New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

New Zealand King Salmon / Equity Bottom-Up

<h2>New Zealand King Salmon<br>FY20 — Scaling Back Recovery Assumptions</h2>
<div></div>
<p><strong>OUTPERFORM</strong></p>
<p>New&nbsp;Zealand&nbsp;King Salmon (NZK) experienced material disruption to sales channels in 2H20, weighing on earnings and leading to a build up in inventory. Although no explicit earnings guidance was provided, commentary suggests it is unlikely FY21&nbsp;EBITDA&nbsp;will exceed FY20 (FY20 NZ$25m, FY21E NZ$22m). We have made significant downgrades to near-term earnings forecasts as we push out a recovery in sales into FY22. Our target price is unchanged at NZ$2.65 as lower cost of capital assumptions offset earnings changes. We continue to have a positive view on the long term&nbsp;growth prospects for&nbsp;NZK, with current consents offering further volume uplifts and option value from positive outcomes on additional water space applications. However, investors should be cognisant that further short-term disruption is likely as the company navigates residual&nbsp;COVID-19 impacts. OUTPERFORM.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/155/471/original/image_48397023641598573665993.png?1598573670" class="editor-image img-responsive" data-smartkarma-image-id="155471"></figure>
<div>
<h3>Navigating&nbsp;COVID-19 demand impacts</h3>
</div>
<div>
<p>NZK&nbsp;reported operating&nbsp;EBITDA&nbsp;of NZ$25m, broadly in line with expectations&nbsp;and partially supported by wage subsidies (NZ$3.8m). With c. 75% of sales via&nbsp;foodservice,&nbsp;NZK&nbsp;experienced significant disruption as&nbsp;COVID-19 effectively closed the channel. In addition, air freight capacity&nbsp;became severely constrained, with freight rates surging. FY20 sales volume (6,331mt) fell -16% on the prior year as a result. Positively, fish performance saw marked improvements as mortality rates fell and the feed conversion ratio improved. Having been as low as 50% of normal levels in April, sales have since recovered to c. 80%.&nbsp;NZK&nbsp;has signalled further investment into sales and marketing to help drive adoption of its retail brand, Regal, in export markets and further establish new channels such as e-commerce and fish mongers.</p>
</div>
<div>
<h3>Higher inventory debt funded; balance sheet remains stable&nbsp;</h3>
</div>
<div>
<p>Inventory levels surged as a result of lower sales, up +75% on the prior year. Due to fish quality considerations and feed discharge limits, NZK has had to harvest more product than it can sell in the COVID-19 impacted short term, with product being frozen. Higher debt (net debt NZ$32m) has been used to fund working capital requirements. Having recently negotiated new facilities and covenants, NZK remains comfortable it has sufficient headroom, even in the event of a summer mortality event.</p>
</div>
<div>
<h3>Long-term value remains; short-term earnings challenged</h3>
</div>
<div>
<p>In the short term NZK is facing 1) high levels of inventory to sell, 2) a significantly weaker foodservice channel, and 3) higher freight costs in FY21. Earnings guidance commentary suggests it may be challenging for FY21 EBITDA to exceed FY20. We expect sales will likely remain at subdued levels for another c. 12 months (time frames on recovery highly uncertain), and effectively push out our sales recovery assumptions. Looking through current disruption we maintain a positive view on the medium to long term growth prospects for NZK, and are attracted to its unique position as the world's largest producer of King salmon. In addition, NZK's Open Ocean and farm relocation applications provide potential upside to earnings not included in our forecasts.</p>
</div>
<div>
<div>
<div>
<div><strong>Guy Hooper</strong></div>
<div><a href="mailto:guy.hooper@forsythbarr.co.nz" target="_blank" rel="noopener">guy.hooper@forsythbarr.co.nz</a></div>
<div>+64 4 495 5255</div>
</div>
</div>
</div>

New Zealand King Salmon FY20 — Scaling Back Recovery Assumptions

OUTPERFORM
New&nbsp;Zealand&nbsp;King Salmon (NZK) experienced material disruption to sales channels in 2H20, weighing on earnings and leading to a build up in inventory. Although no explicit earnings guidance was provided, commentary suggests it is unlikely FY21&nbsp;EBITDA&nbsp;will exceed FY20 (FY20 NZ$25m, FY21E NZ$22m). We have made significant downgrades to near-term earnings forecasts as we push out a recovery in sales into FY22. Our target price is unchanged at NZ$2.65 as lower cost of capital assumptions offset earnings changes. We continue to have a positive view on the long term&nbsp;growth prospects for&nbsp;NZK, with current consents offering further volume uplifts and option value from positive outcomes on additional water space applications. However, investors should be cognisant that further short-term disruption is likely as the company navigates residual&nbsp;COVID-19 impacts. OUTPERFORM.


Navigating&nbsp;COVID-19 demand impacts


NZK&nbsp;reported operating&nbsp;EBITDA&nbsp;of NZ$25m, broadly in line with expectations&nbsp;and partially supported by wage subsidies (NZ$3.8m). With c. 75% of sales via&nbsp;foodservice,&nbsp;NZK&nbsp;experienced significant disruption as&nbsp;COVID-19 effectively closed the channel. In addition, air freight capacity&nbsp;became severely constrained, with freight rates surging. FY20 sales volume (6,331mt) fell -16% on the prior year as a result. Positively, fish performance saw marked improvements as mortality rates fell and the feed conversion ratio improved. Having been as low as 50% of normal levels in April, sales have since recovered to c. 80%.&nbsp;NZK&nbsp;has signalled further investment into sales and marketing to help drive adoption of its retail brand, Regal, in export markets and further establish new channels such as e-commerce and fish mongers.


Higher inventory debt funded; balance sheet remains stable&nbsp;


Inventory levels surged as a result of lower sales, up +75% on the prior year. Due to fish quality considerations and feed discharge limits, NZK has had to harvest more product than it can sell in the COVID-19 impacted short term, with product being frozen. Higher debt (net debt NZ$32m) has been used to fund working capital requirements. Having recently negotiated new facilities and covenants, NZK remains comfortable it has sufficient headroom, even in the event of a summer mortality event.


Long-term value remains; short-term earnings challenged


In the short term NZK is facing 1) high levels of inventory to sell, 2) a significantly weaker foodservice channel, and 3) higher freight costs in FY21. Earnings guidance commentary suggests it may be challenging for FY21 EBITDA to exceed FY20. We expect sales will likely remain at subdued levels for another c. 12 months (time frames on recovery highly uncertain), and effectively push out our sales recovery assumptions. Looking through current disruption we maintain a positive view on the medium to long term growth prospects for NZK, and are attracted to its unique position as the world's largest producer of King salmon. In addition, NZK's Open Ocean and farm relocation applications provide potential upside to earnings not included in our forecasts.




Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255




New Zealand King Salmon: FY20 — Scaling Back Recovery Assumptions