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</h2>
Navigating the Conditions
OUTPERFORM
Sanford's (SAN) market diversification and sustainable protein product slate makes it comparatively more defensive to navigate the COVID-19 demand shock, in our opinion. SAN hosted a call with investors, highlighting the impacts seen to date as a result of COVID-19, including (1) a reduction in operating capacity as a result of distancing policies, and (2) changes to consumer purchasing behaviour, with retail sales surging following a collapse in the foodservice channel. We have lowered our target price to NZ$7.70 from NZ$8.35 (-7.8%), reflecting a combination of revised earnings forecasts and lower market multiples. SAN offers attractive earnings growth and is trading on a 13x 12-month forward PE ratio. Reiterate OUTPERFORM.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SAN</td>
<td style="width: 48pt;">Financials:Sep/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$6.53</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">40.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">42.7</td>
<td style="text-align: left; width: 43.2pt;">55.9</td>
<td style="text-align: left; width: 48pt;">64.3&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">8.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.1</td>
<td style="text-align: left; width: 48pt;">6.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.9&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$770</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">42.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">45.6&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">59.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">68.7&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">11.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">11.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.9&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">0.4</td>
<td style="text-align: left; width: 42.6pt;">6.8</td>
<td style="text-align: left; width: 43.2pt;">30.7</td>
<td style="text-align: left; width: 48pt;">15.2</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">15.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">10.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.5&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">93.6m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">23.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">23.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">23.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">23.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">6.5</td>
<td style="text-align: left; width: 42.6pt;">5.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$611m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">3.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.5&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">92.8k (NZ$632k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">4.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.9&nbsp;</td>
</tr>
</tbody>
</table>
Still operating but at reduced capacity
Fishing and aquaculture activity continues as an 'essential' service, although some supply disruption is occurring as a result of distancing requirements in processing plants. This has mostly been limited to land processing plants, which are expected to operate at 80% capacity while distancing requirements are in place. Although disruption on vessel has been limited to date, risks exist should a case occur on board which would result in ending a trip early, self isolating implications for crew, and likely an extended docking period before the vessel could depart&nbsp;again.
Foodservice's&nbsp;loss is retail's gain
Consumer purchasing behaviour has changed, shifting away from eating out, to at home and through delivery.&nbsp;SAN's&nbsp;relatively&nbsp;small size (on a global scale) and market diversity, enables it to be more nimble in response to demand changes, in our opinion. The&nbsp;foodservice&nbsp;channel, which previously represented c.&nbsp;35%–40% of revenue, effectively disappeared overnight as governments moved to enforce social distancing. SAN has, in response, pivoted product towards the retail channel, which has seen a surge in sales. SAN has developed additional product formats to help meet that demand. In addition, sales through&nbsp;SAN's&nbsp;online delivery channel, Sanford &amp; Sons, have increased +10x, albeit off a small base.
Earnings changes and capital position
We have cut our FY20E&nbsp;EBIT&nbsp;forecast -13% to NZ$66m, to reflect the reduction in operating capacity and lower&nbsp;foodservice&nbsp;demand, partially offset by changes in consumer purchasing behaviour favouring the retail channel. However, the&nbsp;current operating environment is highly fluid&nbsp;and we see risk to the downside should the impacts from&nbsp;COVID-19 prove to be prolonged or more severe than expected.&nbsp;SAN's&nbsp;capital position appears robust, with forecast FY20E net debt/EBITDA&nbsp;of 1.6x (below&nbsp;SAN's&nbsp;target of 1.75x), and at this stage we expect SAN to maintain its dividend. However, should further earnings pressure eventuate, dividend suspension remains available as a capital preservation&nbsp;lever.
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255

Sanford
Navigating the Conditions
OUTPERFORM
Sanford's (SAN) market diversification and sustainable protein product slate makes it comparatively more defensive to navigate the COVID-19 demand shock, in our opinion. SAN hosted a call with investors, highlighting the impacts seen to date as a result of COVID-19, including (1) a reduction in operating capacity as a result of distancing policies, and (2) changes to consumer purchasing behaviour, with retail sales surging following a collapse in the foodservice channel. We have lowered our target price to NZ$7.70 from NZ$8.35 (-7.8%), reflecting a combination of revised earnings forecasts and lower market multiples. SAN offers attractive earnings growth and is trading on a 13x 12-month forward PE ratio. Reiterate OUTPERFORM.
         


NZX Code
SAN
Financials:Sep/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$6.53
NPAT* (NZ$m)
40.0&nbsp;
42.7
55.9
64.3&nbsp;
EV/EBITDA
8.8&nbsp;
8.1
6.6&nbsp;
5.9&nbsp;


Target price
NZ$770
EPS* (NZc)
42.7&nbsp;
45.6&nbsp;
59.7&nbsp;
68.7&nbsp;
EV/EBIT
11.6&nbsp;
11.3&nbsp;
8.9&nbsp;
7.9&nbsp;


Risk rating
Medium
EPS growth* (%)
0.4
6.8
30.7
15.2
PE
15.3&nbsp;
14.3&nbsp;
10.9&nbsp;
9.5&nbsp;


Issued shares
93.6m
DPS (NZc)
23.0&nbsp;
23.0&nbsp;
23.0&nbsp;
23.0&nbsp;
Price/NTA
6.5
5.4&nbsp;
4.1&nbsp;
3.2&nbsp;


Market cap
NZ$611m
Imputation (%)
100
100
100
100
Cash div yld (%)
3.5&nbsp;
3.5&nbsp;
3.5&nbsp;
3.5&nbsp;


Avg daily turnover
92.8k (NZ$632k)
*Based on normalised profits


Gross div yld (%)
4.9&nbsp;
4.9&nbsp;
4.9&nbsp;
4.9&nbsp;



Still operating but at reduced capacity
Fishing and aquaculture activity continues as an 'essential' service, although some supply disruption is occurring as a result of distancing requirements in processing plants. This has mostly been limited to land processing plants, which are expected to operate at 80% capacity while distancing requirements are in place. Although disruption on vessel has been limited to date, risks exist should a case occur on board which would result in ending a trip early, self isolating implications for crew, and likely an extended docking period before the vessel could depart&nbsp;again.
Foodservice's&nbsp;loss is retail's gain
Consumer purchasing behaviour has changed, shifting away from eating out, to at home and through delivery.&nbsp;SAN's&nbsp;relatively&nbsp;small size (on a global scale) and market diversity, enables it to be more nimble in response to demand changes, in our opinion. The&nbsp;foodservice&nbsp;channel, which previously represented c.&nbsp;35%–40% of revenue, effectively disappeared overnight as governments moved to enforce social distancing. SAN has, in response, pivoted product towards the retail channel, which has seen a surge in sales. SAN has developed additional product formats to help meet that demand. In addition, sales through&nbsp;SAN's&nbsp;online delivery channel, Sanford &amp; Sons, have increased +10x, albeit off a small base.
Earnings changes and capital position
We have cut our FY20E&nbsp;EBIT&nbsp;forecast -13% to NZ$66m, to reflect the reduction in operating capacity and lower&nbsp;foodservice&nbsp;demand, partially offset by changes in consumer purchasing behaviour favouring the retail channel. However, the&nbsp;current operating environment is highly fluid&nbsp;and we see risk to the downside should the impacts from&nbsp;COVID-19 prove to be prolonged or more severe than expected.&nbsp;SAN's&nbsp;capital position appears robust, with forecast FY20E net debt/EBITDA&nbsp;of 1.6x (below&nbsp;SAN's&nbsp;target of 1.75x), and at this stage we expect SAN to maintain its dividend. However, should further earnings pressure eventuate, dividend suspension remains available as a capital preservation&nbsp;lever.
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255

Sanford Limited

Sanford: Navigating the Conditions