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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Sanford</h2>
FY19 Result — Navigating Choppy Waters<a target="_blank"></a>
Sanford (SAN) continued to show signs of execution on its value add strategy in FY19, albeit headline growth was weighed down by a number of headwinds including a one off vessel outage. Outlook commentary appears positive heading into FY20, and we have made small revisions to our aquaculture assumptions, lifting our earnings forecasts slightly. We continue to like SAN given (1) its strategy of moving up the value chain, (2) undemanding valuation at 13x forward PE, and (3) possible upside from aquaculture opportunities. OUTPERFORM.
What’s changed?
<ul>
<li>Earnings: We have made small positive revisions to EBIT, FY20E/FY21E/FY22E up +2%/+2%/+1%.</li>
<li>Target Price: Increased to NZ$8.35 from NZ$8.10, consistent with earnings changes.</li>
<li>Rating: OUTPERFORM.</li>
</ul>
FY19 a mixed catch
SAN reported a reasonable FY19 in light of headwinds faced during the period, with Underlying EBIT of NZ$65m, flat on the prior comparable period. Broad based pricing growth and pockets of strong volumes helped to offset a number of headwinds in FY19, including an extended vessel outage (c. -NZ$4m impact to EBIT) and algae blooms (c. -NZ$4m). Growth was led by the aquaculture divisions, salmon and mussels, where both pricing and volume growth positively surprised.
Evidence of EBIT/kg improvement slow but encouraging
SAN continues to make progress towards its FY23 NZ$1.00/kg EBIT/kg target, albeit slowly, reporting NZ$0.56/kg in FY19. When adjusting for the one off vessel outage, EBIT/kg lifts to NZ$0.60/kg. SAN continues to make improvements to its Hoki product mix (blocks to fillets, +NZ$5m to FY19 EBIT) and changes to distribution partners are providing early wins for aquaculture price realisation.
In order to continue to achieve value growth significant investment is required, in our opinion. SAN has guided to FY20E capex of NZ$80m and we expect capex requirements will remain above NZ$55m per annum out to FY23.
Aquaculture upside exists; new investments provide flexibility
We believe upside to our forecasts exists from possible aquaculture opportunities, through either greater volume realisation or additional nutraceutical products. SAN outlined a number of investments including a new salmon hatchery and a marine extract centre. We view these investments positively and as providing SAN flexibility to grow its aquaculture operations in the future.&nbsp;
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Investment View
SAN has a unique asset in its significant holdings of commercial fishing quota and extensive marine farming operations. While short term earnings volatility from swings in catch volume/mix will remain a feature, SAN’s strategy to move up the value chain appears both sensible and achievable. Execution on EBIT/kg target is likely to be a key driver of performance. OUTPERFORM.&nbsp;
</div>
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255

Sanford
FY19 Result — Navigating Choppy Waters
Sanford (SAN) continued to show signs of execution on its value add strategy in FY19, albeit headline growth was weighed down by a number of headwinds including a one off vessel outage. Outlook commentary appears positive heading into FY20, and we have made small revisions to our aquaculture assumptions, lifting our earnings forecasts slightly. We continue to like SAN given (1) its strategy of moving up the value chain, (2) undemanding valuation at 13x forward PE, and (3) possible upside from aquaculture opportunities. OUTPERFORM.
What’s changed?

Earnings: We have made small positive revisions to EBIT, FY20E/FY21E/FY22E up +2%/+2%/+1%.
Target Price: Increased to NZ$8.35 from NZ$8.10, consistent with earnings changes.
Rating: OUTPERFORM.

FY19 a mixed catch
SAN reported a reasonable FY19 in light of headwinds faced during the period, with Underlying EBIT of NZ$65m, flat on the prior comparable period. Broad based pricing growth and pockets of strong volumes helped to offset a number of headwinds in FY19, including an extended vessel outage (c. -NZ$4m impact to EBIT) and algae blooms (c. -NZ$4m). Growth was led by the aquaculture divisions, salmon and mussels, where both pricing and volume growth positively surprised.
Evidence of EBIT/kg improvement slow but encouraging
SAN continues to make progress towards its FY23 NZ$1.00/kg EBIT/kg target, albeit slowly, reporting NZ$0.56/kg in FY19. When adjusting for the one off vessel outage, EBIT/kg lifts to NZ$0.60/kg. SAN continues to make improvements to its Hoki product mix (blocks to fillets, +NZ$5m to FY19 EBIT) and changes to distribution partners are providing early wins for aquaculture price realisation.
In order to continue to achieve value growth significant investment is required, in our opinion. SAN has guided to FY20E capex of NZ$80m and we expect capex requirements will remain above NZ$55m per annum out to FY23.
Aquaculture upside exists; new investments provide flexibility
We believe upside to our forecasts exists from possible aquaculture opportunities, through either greater volume realisation or additional nutraceutical products. SAN outlined a number of investments including a new salmon hatchery and a marine extract centre. We view these investments positively and as providing SAN flexibility to grow its aquaculture operations in the future.&nbsp;

Investment View
SAN has a unique asset in its significant holdings of commercial fishing quota and extensive marine farming operations. While short term earnings volatility from swings in catch volume/mix will remain a feature, SAN’s strategy to move up the value chain appears both sensible and achievable. Execution on EBIT/kg target is likely to be a key driver of performance. OUTPERFORM.&nbsp;

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

Sanford: FY19 Result — Navigating Choppy Waters

Sanford Limited

Sanford: FY19 Result — Navigating Choppy Waters