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

<h2>Sanford<br>1H21 Preview&nbsp;— New Captain at the Helm</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Sanford (SAN) is set to report weak earnings, materially down on the prior period, when it releases a COVID-19 impacted 1H21 result on Friday, 21 May. A challenging demand backdrop as a result of COVID-19 related disruption to&nbsp;foodservice&nbsp;is the key driver of earnings weakness, however, this has been compounded by rising freight costs and labour shortages. While activity likely remains suppressed, we view challenges as transitional, and we look for any signs of a recovery in demand expectations and forward pricing comments.&nbsp;SAN's&nbsp;1H21 result will also be the first time the market hears from new CEO, Peter&nbsp;Reidie, having officially started in the role in April.</p>
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<h3>Key issues to consider at&nbsp;SAN's&nbsp;1H21 result</h3>
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<li><strong>Seafood demand</strong> —&nbsp;The key earnings overhang is the disruption to restaurant trade. Market anecdotes suggest there are pockets of recovery, however, seafood demand is likely to lag a general recovery in&nbsp;foodservice&nbsp;given the shorter shelf life and supply chain challenges. We look for any indication on recent trading and success of channel redeployment strategies.&nbsp;</li>
<li><strong>Inventory levels</strong> —&nbsp;1H21 inventory levels are expected to be broadly flat on FY20 (NZ$85m), c. +50% ahead of the prior year period. Inventory levels are also elevated by mix impacts&nbsp;due to a normalisation of catch volumes&nbsp;in the&nbsp;higher value&nbsp;Toothfish&nbsp;fishery. Comments around levels of committed inventory (contracted for sale) and pricing&nbsp;expectations&nbsp;will be of interest.</li>
<li><strong>Balance sheet and&nbsp;capex&nbsp;guidance</strong> —&nbsp;Gearing levels are elevated due to a combination of weak earnings and high working capital requirements, raising capital allocation questions. We do not expect an interim dividend as a result. SAN&nbsp;has signalled a lower&nbsp;capex&nbsp;outlook with project&nbsp;prioritisation&nbsp;<wbr>occurring, which can help temporarily.&nbsp;Capex&nbsp;guidance and implications for earnings growth will be key questions.</li>
<li><strong>Earnings guidance</strong> — SAN's most recent outlook commentary — "year-to-date trading conditions and expected financial outcomes are similar to those seen in 2H20" — implies FY21 EBIT guidance of c.NZ$30m (2H20 underlying EBIT NZ$15m). We expect earnings to be weighted to the second half, and therefore forecast 1H21 EBIT of NZ$13m. However, recognise supply chain challenges and elevated inventory clearance can lead to timing issues, creating interim forecasting difficulty.</li>
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<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>
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Sanford 1H21 Preview&nbsp;— New Captain at the Helm

OUTPERFORM
Sanford (SAN) is set to report weak earnings, materially down on the prior period, when it releases a COVID-19 impacted 1H21 result on Friday, 21 May. A challenging demand backdrop as a result of COVID-19 related disruption to&nbsp;foodservice&nbsp;is the key driver of earnings weakness, however, this has been compounded by rising freight costs and labour shortages. While activity likely remains suppressed, we view challenges as transitional, and we look for any signs of a recovery in demand expectations and forward pricing comments.&nbsp;SAN's&nbsp;1H21 result will also be the first time the market hears from new CEO, Peter&nbsp;Reidie, having officially started in the role in April.


Key issues to consider at&nbsp;SAN's&nbsp;1H21 result



Seafood demand —&nbsp;The key earnings overhang is the disruption to restaurant trade. Market anecdotes suggest there are pockets of recovery, however, seafood demand is likely to lag a general recovery in&nbsp;foodservice&nbsp;given the shorter shelf life and supply chain challenges. We look for any indication on recent trading and success of channel redeployment strategies.&nbsp;
Inventory levels —&nbsp;1H21 inventory levels are expected to be broadly flat on FY20 (NZ$85m), c. +50% ahead of the prior year period. Inventory levels are also elevated by mix impacts&nbsp;due to a normalisation of catch volumes&nbsp;in the&nbsp;higher value&nbsp;Toothfish&nbsp;fishery. Comments around levels of committed inventory (contracted for sale) and pricing&nbsp;expectations&nbsp;will be of interest.
Balance sheet and&nbsp;capex&nbsp;guidance —&nbsp;Gearing levels are elevated due to a combination of weak earnings and high working capital requirements, raising capital allocation questions. We do not expect an interim dividend as a result. SAN&nbsp;has signalled a lower&nbsp;capex&nbsp;outlook with project&nbsp;prioritisation&nbsp;occurring, which can help temporarily.&nbsp;Capex&nbsp;guidance and implications for earnings growth will be key questions.
Earnings guidance — SAN's most recent outlook commentary — "year-to-date trading conditions and expected financial outcomes are similar to those seen in 2H20" — implies FY21 EBIT guidance of c.NZ$30m (2H20 underlying EBIT NZ$15m). We expect earnings to be weighted to the second half, and therefore forecast 1H21 EBIT of NZ$13m. However, recognise supply chain challenges and elevated inventory clearance can lead to timing issues, creating interim forecasting difficulty.





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




Sanford: 1H21 Preview — New Captain at the Helm

Sanford Limited

Sanford: 1H21 Preview — New Captain at the Helm