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 (NZK)</h2>
FY20 Result Initial Impressions — COVID Challenges
New Zealand King Salmon (NZK) reported a result in line with expectations, with FY20 Operating EBITDA of NZ$25m vs. Forsyth Barr NZ$26m. FY20 has been a challenging period for NZK as global lockdowns and social distancing requirements effectively closed the foodservice channel for a period of time. Although sales have recovered from lows, it still remains at ~80% of normal levels.
Unsurprisingly NZK will not pay a final dividend, with dividends to be reviewed next year.
Difficult near-term outlook — pushing out any recovery assumptions
NZK is not yet through its COVID-19 disruption and we expect to make significant downgrades to FY21 as we push out a recovery in sales. NZK is facing 1) high levels of inventory to sell, 2) a significantly weaker foodservice channel, and 3) higher freight costs. Earnings guidance commentary suggests “it may be challenging for FY21 EBITDA to exceed FY20”.
Result take outs
<ul>
<li>Sales volumes lower — During Alert Level 4, sales fell to 50% of normal levels, and although activity has recovered slightly, volumes remain at suppressed levels.</li>
<li>Inventory levels elevated — NZ$35.6m of inventory at balance date (FY19 NZ$20.8m, up +71%). With foodservice challenged NZK has been freezing product. We expect inventory to continue to climb until sales return to pre-COVID levels</li>
<li>Balance sheet — Increase in net debt associated with higher inventory (FY20 net debt NZ$31m vs. FY19 NZ$9m). NZK remains comfortable it has sufficient headroom in current facilities and covenants.</li>
<li>Open ocean — NZK’s Blue Endeavour open ocean site has seen a further delay as its hearing was pushed out as a result of New Zealand’s lockdowns. A hearing is now expected towards the end of the year with an outcome expected mid-2021. Sticking to this timeline, first harvest should occur in Q4 of CY2023 (previously Q1). We view open ocean as a significant opportunity for the aquaculture industry, however timeframes are long and uncertain, and at this stage we attribute no value to this application in our forecasts.</li>
<li>Fish performance a positive — On a positive note, fish performance experienced an improvement on the prior year, with NZK achieving an FY20 mortality rate of 15% (FY19 23%) and lower feed conversion rate (1.76x vs 1.80x)</li>
</ul>
Conference call — 10am NZT
NZK will host a conference call at 10am NZT. Dial in&nbsp;New Zealand 0800 122 136.&nbsp;Conference ID 10008645.
FY20 result summary (NZ$m)
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1676125265750587426&amp;th=1742cb0c781ef822&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ86MJpNeQqCqwdKBmfh_5jLXwXn2GsTZ1f7pIqS-QuSNQQmQmao1fwJLopm_B3dKTfKW5mxatDh6cxUpx4AjteOymkyHhMJzZwl8pB-KxDTmrx6EICRtQJmA7o&amp;disp=emb" width="455" height="392" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: Company reports, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1676125265750587426&amp;th=1742cb0c781ef822&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-S0kO1DhkbRL_Duc5IFXnVwBKgZskU06Iy4kt9g_1I9OhpV8uU2GtGsDbFSks7K3QfrdgTSd1x6SMmL6JCkmyTMQC48ed5PDeiOY4VxWPKEGL25R_JtY8qBdU&amp;disp=emb" class="editor-image img-responsive"></figure>
P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

New Zealand King Salmon (NZK)
FY20 Result Initial Impressions — COVID Challenges
New Zealand King Salmon (NZK) reported a result in line with expectations, with FY20 Operating EBITDA of NZ$25m vs. Forsyth Barr NZ$26m. FY20 has been a challenging period for NZK as global lockdowns and social distancing requirements effectively closed the foodservice channel for a period of time. Although sales have recovered from lows, it still remains at ~80% of normal levels.
Unsurprisingly NZK will not pay a final dividend, with dividends to be reviewed next year.
Difficult near-term outlook — pushing out any recovery assumptions
NZK is not yet through its COVID-19 disruption and we expect to make significant downgrades to FY21 as we push out a recovery in sales. NZK is facing 1) high levels of inventory to sell, 2) a significantly weaker foodservice channel, and 3) higher freight costs. Earnings guidance commentary suggests “it may be challenging for FY21 EBITDA to exceed FY20”.
Result take outs

Sales volumes lower — During Alert Level 4, sales fell to 50% of normal levels, and although activity has recovered slightly, volumes remain at suppressed levels.
Inventory levels elevated — NZ$35.6m of inventory at balance date (FY19 NZ$20.8m, up +71%). With foodservice challenged NZK has been freezing product. We expect inventory to continue to climb until sales return to pre-COVID levels
Balance sheet — Increase in net debt associated with higher inventory (FY20 net debt NZ$31m vs. FY19 NZ$9m). NZK remains comfortable it has sufficient headroom in current facilities and covenants.
Open ocean — NZK’s Blue Endeavour open ocean site has seen a further delay as its hearing was pushed out as a result of New Zealand’s lockdowns. A hearing is now expected towards the end of the year with an outcome expected mid-2021. Sticking to this timeline, first harvest should occur in Q4 of CY2023 (previously Q1). We view open ocean as a significant opportunity for the aquaculture industry, however timeframes are long and uncertain, and at this stage we attribute no value to this application in our forecasts.
Fish performance a positive — On a positive note, fish performance experienced an improvement on the prior year, with NZK achieving an FY20 mortality rate of 15% (FY19 23%) and lower feed conversion rate (1.76x vs 1.80x)

Conference call — 10am NZT
NZK will host a conference call at 10am NZT. Dial in&nbsp;New Zealand 0800 122 136.&nbsp;Conference ID 10008645.
FY20 result summary (NZ$m)

Source: Company reports, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities

P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

New Zealand King Salmon (NZK): FY20 Result Initial Impressions — COVID Challenges