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>FY22 Result — Fried, Smoked or Grilled?&nbsp;</h2>
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<h3>RESEARCH&nbsp;INSIGHTS</h3>
<p>New Zealand King Salmon (NZK) reported an underwhelming FY22 result (largely pre-announced) but shocked investors with 1) a NZ$60m proposed capital raise and 2) new FY23 guidance -163% below both our and consensus expectations. Earnings pressure is being driven by warm waters continuing to severely impact fish mortality, ongoing elevated freight costs and a de-scaling of the business, reducing harvest and sales volumes. NZK expects to use the proposed capital raise to de-leverage the balance sheet and provide liquidity for medium term operating requirements. Going forward, NZK has stated that the hearing for its Open Ocean Blue Endeavour application is likely to be completed by the end of April 2022, with a decision mid-year. Any appeal against it would set the date back six months to December 2022. In the short term, NZK faces a number of challenges around warming waters and the subsequent impact to fish health and mortality and while a successful Blue Endeavour application would provide relief for the company, FY27 is the earliest possible harvest and we note a high degree of execution risk.&nbsp;</p>
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<h3>Key FY22 result takeouts</h3>
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<p>Exceptional fish mortality in FY22 was driven by 1) a change in farming model, 2) warming water temperatures and 3) increased temperature volatility. Earnings pressure was compounded by supply chain disruption and soaring freight charges.&nbsp;The company has decided to fallow three farms in the&nbsp;Pelorus&nbsp;Sounds (to avoid high summer water temperatures) resulting in significant reduction of harvest volumes for future years. As&nbsp;a result of this de-scaling of the business and increased risk profile, goodwill of NZ$40m and P&amp;E and intangibles of NZ$20m has been written off following the group’s annual&nbsp;impairment test. FY23 EBITDA guidance is&nbsp;-NZ$8m to -NZ$12m (vs consensus and&nbsp;Forsyth&nbsp;Barr prior forecasts of&nbsp;NZ$17m)​​​​​​​. The company does however expect by FY24 that it can deliver a normalised EBITDA of NZ$15m to&nbsp;NZ$19m. We forecast a conservative EBITDA of NZ$4.9m/14.5m&nbsp;for FY24/FY25.&nbsp;</p>
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<h3>Blue Endeavour Application - little new information&nbsp;</h3>
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<p>NZK estimates that the benefits of a successful Blue Endeavour application would enable a re-scaling of operations, improve the efficiency of the business and drive significant improvements in fish health. The company remain&nbsp;hopeful of a successful application given the alignment to&nbsp;the government's&nbsp;aquaculture strategy (aiming to generate NZ$3bn of revenue across New Zealand by 2030).&nbsp;</p>
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<h3>Pro Rata&nbsp;Renounceable&nbsp;Rights Offer Details</h3>
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<ul>
<li>Fully&nbsp;underwritten capital raise of NZ$60.1m, 2.85 for 1 pro rata&nbsp;renounceable&nbsp;rights offer at an issue price of NZ$0.15 per share</li>
<li>This&nbsp;is a 82.6% discount to&nbsp;closing&nbsp;price on 12 April 2022 of NZ$0.86 and 55.1% discount to the TERP of NZ$0.33</li>
<li>The proceeds will be used to&nbsp;delever&nbsp;the balance sheet and provide liquidity for operations</li>
<li>The&nbsp;rights offer will close at 5pm NZT on 6 May 2022 (record date for rights offer 7pm NAT 26 April 2022)</li>
</ul>
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New Zealand King Salmon FY22 Result — Fried, Smoked or Grilled?&nbsp;

RESEARCH&nbsp;INSIGHTS
New Zealand King Salmon (NZK) reported an underwhelming FY22 result (largely pre-announced) but shocked investors with 1) a NZ$60m proposed capital raise and 2) new FY23 guidance -163% below both our and consensus expectations. Earnings pressure is being driven by warm waters continuing to severely impact fish mortality, ongoing elevated freight costs and a de-scaling of the business, reducing harvest and sales volumes. NZK expects to use the proposed capital raise to de-leverage the balance sheet and provide liquidity for medium term operating requirements. Going forward, NZK has stated that the hearing for its Open Ocean Blue Endeavour application is likely to be completed by the end of April 2022, with a decision mid-year. Any appeal against it would set the date back six months to December 2022. In the short term, NZK faces a number of challenges around warming waters and the subsequent impact to fish health and mortality and while a successful Blue Endeavour application would provide relief for the company, FY27 is the earliest possible harvest and we note a high degree of execution risk.&nbsp;


Key FY22 result takeouts


Exceptional fish mortality in FY22 was driven by 1) a change in farming model, 2) warming water temperatures and 3) increased temperature volatility. Earnings pressure was compounded by supply chain disruption and soaring freight charges.&nbsp;The company has decided to fallow three farms in the&nbsp;Pelorus&nbsp;Sounds (to avoid high summer water temperatures) resulting in significant reduction of harvest volumes for future years. As&nbsp;a result of this de-scaling of the business and increased risk profile, goodwill of NZ$40m and P&amp;E and intangibles of NZ$20m has been written off following the group’s annual&nbsp;impairment test. FY23 EBITDA guidance is&nbsp;-NZ$8m to -NZ$12m (vs consensus and&nbsp;Forsyth&nbsp;Barr prior forecasts of&nbsp;NZ$17m)​​​​​​​. The company does however expect by FY24 that it can deliver a normalised EBITDA of NZ$15m to&nbsp;NZ$19m. We forecast a conservative EBITDA of NZ$4.9m/14.5m&nbsp;for FY24/FY25.&nbsp;


Blue Endeavour Application - little new information&nbsp;


NZK estimates that the benefits of a successful Blue Endeavour application would enable a re-scaling of operations, improve the efficiency of the business and drive significant improvements in fish health. The company remain&nbsp;hopeful of a successful application given the alignment to&nbsp;the government's&nbsp;aquaculture strategy (aiming to generate NZ$3bn of revenue across New Zealand by 2030).&nbsp;


Pro Rata&nbsp;Renounceable&nbsp;Rights Offer Details



Fully&nbsp;underwritten capital raise of NZ$60.1m, 2.85 for 1 pro rata&nbsp;renounceable&nbsp;rights offer at an issue price of NZ$0.15 per share
This&nbsp;is a 82.6% discount to&nbsp;closing&nbsp;price on 12 April 2022 of NZ$0.86 and 55.1% discount to the TERP of NZ$0.33
The proceeds will be used to&nbsp;delever&nbsp;the balance sheet and provide liquidity for operations
The&nbsp;rights offer will close at 5pm NZT on 6 May 2022 (record date for rights offer 7pm NAT 26 April 2022)



New Zealand King Salmon: FY22 Result — Fried, Smoked or Grilled?