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>Still Looking to the Horizon...</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Sanford's (SAN) market update highlighted the ongoing challenges in the seafood sector, with a recovery in foodservice demand slow and lagging other areas of the economy. Compounding earnings pressure is cost inflation, with supply chain congestion and labour shortages weighing on margins. Positively, volumes are beginning to move again and the inventory build has slowed. We have made material cuts to near-term earnings, and pushed a recovery to pre COVID-19 earnings out to FY23. We downgrade our target price. Small wins in SAN's retail transition and greenshoots in regions where consumer mobility has returned provide support to an eventual recovery, however, the path and timing remains uncertain. Whilst earnings are suppressed, we expect 1H21 to represent a low. We view the current share price as an attractive entry point for exposure to a series of unique fisheries and marine farm assets, for investors that are willing to be patient. OUTPERFORM.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/199/014/original/image_37756512131617667297185.png?1617667301" class="editor-image img-responsive" data-smartkarma-image-id="199014"></figure>
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<h3>What's changed?&nbsp;</h3>
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<ul>
<li><strong>Earnings</strong>:&nbsp;We lower our FY21E and FY22E EBIT forecasts -32% and -31% respectively to NZ$30m&nbsp;and&nbsp;NZ$46m. We cut our FY23E EBIT -18% to NZ$61m (FY19 NZ$65m), with more limited changes thereafter.</li>
<li><strong>Target price</strong>:&nbsp;We lower our target price -NZ$1.00 (-15%) to NZ$6.00, reflecting earnings pressure and changes to our cost of capital assumptions.</li>
</ul>
</div>
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<h3>The negatives — demand is tough and driving lower prices</h3>
</div>
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<ul>
<li><strong>Demand&nbsp;</strong>—&nbsp;Global&nbsp;foodservice&nbsp;demand continues to be soft. Areas of&nbsp;Europe have entered another&nbsp;lockdown&nbsp;and while North America is improving it remains at suppressed levels.</li>
<li><strong>Price&nbsp;</strong>—&nbsp;On average, product prices are down -8% on prior year levels, led by weakness in&nbsp;mussels.&nbsp;SAN remains a largely&nbsp;commodity driven business, particularly in the current environment.&nbsp;Whilst this limits opportunity for price differentiation near-term, it also mitigates any brand risk. We expect price recovery to occur as demand returns and excess inventory clears</li>
<li><strong>Costs&nbsp;</strong>—&nbsp;Supply chain and inventory holding costs are up c. +25% on the prior year. In addition, we suspect wage inflation in other industries (e.g. horticulture) is compounding labour pressures for onshore processing.</li>
<li><strong>Balance sheet and&nbsp;capex&nbsp;expectations</strong> — Soft earnings and elevated working capital requirements have pushed gearing to elevated levels, although it remains within covenants. Capex expectations are suppressed as a result, with project prioritisation occurring. Asset sales (previously signalled) have provided an additional NZ$24m cash injection, alleviating some pressure.</li>
</ul>
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<h3>The positives... more limited near-term</h3>
</div>
<div id="m_7443778660843047654in6ji">
<ul>
<li><strong>Volume recovering with&nbsp;inventory levels holding</strong> —&nbsp;Sales volume appears to be recovering (albeit at low price/margin) with the inventory build halted. 1H21 inventory is expected to be broadly flat on FY20.</li>
<li><strong>Channel diversification&nbsp;</strong>—&nbsp;SAN continues&nbsp;to address&nbsp;channel exposure, transitioning volume towards the retail channel. Market anecdotes suggest a number of small wins, particularly in King Salmon and Orange&nbsp;Roughy</li>
</ul>
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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>
</div>
</div>
</div>

Sanford Still Looking to the Horizon...

OUTPERFORM
Sanford's (SAN) market update highlighted the ongoing challenges in the seafood sector, with a recovery in foodservice demand slow and lagging other areas of the economy. Compounding earnings pressure is cost inflation, with supply chain congestion and labour shortages weighing on margins. Positively, volumes are beginning to move again and the inventory build has slowed. We have made material cuts to near-term earnings, and pushed a recovery to pre COVID-19 earnings out to FY23. We downgrade our target price. Small wins in SAN's retail transition and greenshoots in regions where consumer mobility has returned provide support to an eventual recovery, however, the path and timing remains uncertain. Whilst earnings are suppressed, we expect 1H21 to represent a low. We view the current share price as an attractive entry point for exposure to a series of unique fisheries and marine farm assets, for investors that are willing to be patient. OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;We lower our FY21E and FY22E EBIT forecasts -32% and -31% respectively to NZ$30m&nbsp;and&nbsp;NZ$46m. We cut our FY23E EBIT -18% to NZ$61m (FY19 NZ$65m), with more limited changes thereafter.
Target price:&nbsp;We lower our target price -NZ$1.00 (-15%) to NZ$6.00, reflecting earnings pressure and changes to our cost of capital assumptions.



The negatives — demand is tough and driving lower prices



Demand&nbsp;—&nbsp;Global&nbsp;foodservice&nbsp;demand continues to be soft. Areas of&nbsp;Europe have entered another&nbsp;lockdown&nbsp;and while North America is improving it remains at suppressed levels.
Price&nbsp;—&nbsp;On average, product prices are down -8% on prior year levels, led by weakness in&nbsp;mussels.&nbsp;SAN remains a largely&nbsp;commodity driven business, particularly in the current environment.&nbsp;Whilst this limits opportunity for price differentiation near-term, it also mitigates any brand risk. We expect price recovery to occur as demand returns and excess inventory clears
Costs&nbsp;—&nbsp;Supply chain and inventory holding costs are up c. +25% on the prior year. In addition, we suspect wage inflation in other industries (e.g. horticulture) is compounding labour pressures for onshore processing.
Balance sheet and&nbsp;capex&nbsp;expectations — Soft earnings and elevated working capital requirements have pushed gearing to elevated levels, although it remains within covenants. Capex expectations are suppressed as a result, with project prioritisation occurring. Asset sales (previously signalled) have provided an additional NZ$24m cash injection, alleviating some pressure.



The positives... more limited near-term



Volume recovering with&nbsp;inventory levels holding —&nbsp;Sales volume appears to be recovering (albeit at low price/margin) with the inventory build halted. 1H21 inventory is expected to be broadly flat on FY20.
Channel diversification&nbsp;—&nbsp;SAN continues&nbsp;to address&nbsp;channel exposure, transitioning volume towards the retail channel. Market anecdotes suggest a number of small wins, particularly in King Salmon and Orange&nbsp;Roughy





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




Sanford Limited

Sanford: Still Looking to the Horizon...