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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Scales</h2>
1H19&nbsp;Preview — A Growing Business
Scales (SCL) will report its 1H19 result on Wednesday, 28 August 2019. It has been a transformational past 12-months for SCL with ~NZ$200m of assets sales and further M&amp;A activity within its Food Ingredients business. Our key focus at the result will be 1) traction of new apple varieties, 2) an update on, and progression of, the evolving pet food strategy, and 3) additional clarity around possible transformational acquisitions. SCL’s current FY19 guidance is for underlying NPAT of NZ$32m to NZ$37m which implies an underlying EBITDA guidance range of NZ$49m to NZ$55m.
Key issues to consider at SCL’s 1H19 result
<ul>
<li>Chinese apple prices:&nbsp;Following a materially weaker Chinese apple harvest, prices of domestic produce soared in China. We expect SCL to have benefitted from positive pricing trends, although not to the same extent as local varieties given SCL’s apples tend to sell at a material premium to Chinese produce.</li>
<li>Traction of new apple varieties:&nbsp;Mr Apple has launched commercial volumes of new varieties DazzleTM&nbsp;and PosyTM in China. Orchard redevelopment is occurring in these varieties; therefore, market response and prices achieved will be critical for future success.</li>
<li>Food ingredients outlook: SCL has an EBITDA target for its Food Ingredients business of NZ$25m by FY22, which we view as aspirational without further acquisitions or product development. Having purchased a business, partially sold another, and entered into a joint venture in the past 12 months, we look for more clarity in an updated strategy.</li>
<li>Major acquisition possible:&nbsp;Following recent divestments SCL has a net cash position of ~NZ$107m, with additional balance sheet headroom for debt of ~NZ$200m. SCL has indicated it is pursuing a potentially transformational acquisition, targeting vertically integrated agriculture companies with a China export focus. The broad spectrum of acquisition possibilities creates investment uncertainty, in our opinion.</li>
</ul>
Conference call details
SCL will host a 1H19 result conference call at 10am on 28 August 2019. Dial in details: New Zealand 0800 122 360, Conference ID: 10001515
Figure 1. 1H19 result expectations (NZ$m)
<table class="table table-striped">
<thead>
<tr>
<td></td>
<td>
1H18
</td>
<td>
1H19
</td>
<td>
% chg
</td>
<td>
Consensus
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
Revenue
</td>
<td>
220.1
</td>
<td>
247.0
</td>
<td>
12%
</td>
<td>
n/a
</td>
</tr>
<tr>
<td>
EBITDA
</td>
<td>
46.7
</td>
<td>
48.3
</td>
<td>
3%
</td>
<td>
n/a
</td>
</tr>
<tr>
<td>
Reported NPAT
</td>
<td>
29.3
</td>
<td>
34.7
</td>
<td>
18%
</td>
<td>
n/a
</td>
</tr>
<tr>
<td>
EPS (cps)
</td>
<td>
21.0
</td>
<td>
24.8
</td>
<td>
18%
</td>
<td>
n/a
</td>
</tr>
<tr>
<td>
Dividend (cps)
</td>
<td>
9.5
</td>
<td>
9.5
</td>
<td>
0%
</td>
<td>
n/a
</td>
</tr>
</tbody>
</table>
&nbsp;Source: Bloomberg, Forsyth Barr analysis
<div class="content-highlight">
Investment View
SCL is an export focussed company offering investors broad exposure to New Zealand agriculture, with operations in horticulture and meat processing. Although pet food is a growing part of the business, annual apple harvest outcomes and global apple prices will remain key drivers of business performance in the near-term. NEUTRAL.
</div>
Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

Scales
1H19&nbsp;Preview — A Growing Business
Scales (SCL) will report its 1H19 result on Wednesday, 28 August 2019. It has been a transformational past 12-months for SCL with ~NZ$200m of assets sales and further M&amp;A activity within its Food Ingredients business. Our key focus at the result will be 1) traction of new apple varieties, 2) an update on, and progression of, the evolving pet food strategy, and 3) additional clarity around possible transformational acquisitions. SCL’s current FY19 guidance is for underlying NPAT of NZ$32m to NZ$37m which implies an underlying EBITDA guidance range of NZ$49m to NZ$55m.
Key issues to consider at SCL’s 1H19 result

Chinese apple prices:&nbsp;Following a materially weaker Chinese apple harvest, prices of domestic produce soared in China. We expect SCL to have benefitted from positive pricing trends, although not to the same extent as local varieties given SCL’s apples tend to sell at a material premium to Chinese produce.
Traction of new apple varieties:&nbsp;Mr Apple has launched commercial volumes of new varieties DazzleTM&nbsp;and PosyTM in China. Orchard redevelopment is occurring in these varieties; therefore, market response and prices achieved will be critical for future success.
Food ingredients outlook: SCL has an EBITDA target for its Food Ingredients business of NZ$25m by FY22, which we view as aspirational without further acquisitions or product development. Having purchased a business, partially sold another, and entered into a joint venture in the past 12 months, we look for more clarity in an updated strategy.
Major acquisition possible:&nbsp;Following recent divestments SCL has a net cash position of ~NZ$107m, with additional balance sheet headroom for debt of ~NZ$200m. SCL has indicated it is pursuing a potentially transformational acquisition, targeting vertically integrated agriculture companies with a China export focus. The broad spectrum of acquisition possibilities creates investment uncertainty, in our opinion.

Conference call details
SCL will host a 1H19 result conference call at 10am on 28 August 2019. Dial in details: New Zealand 0800 122 360, Conference ID: 10001515
Figure 1. 1H19 result expectations (NZ$m)





1H18


1H19


% chg


Consensus






Revenue


220.1


247.0


12%


n/a




EBITDA


46.7


48.3


3%


n/a




Reported NPAT


29.3


34.7


18%


n/a




EPS (cps)


21.0


24.8


18%


n/a




Dividend (cps)


9.5


9.5


0%


n/a




&nbsp;Source: Bloomberg, Forsyth Barr analysis

Investment View
SCL is an export focussed company offering investors broad exposure to New Zealand agriculture, with operations in horticulture and meat processing. Although pet food is a growing part of the business, annual apple harvest outcomes and global apple prices will remain key drivers of business performance in the near-term. NEUTRAL.

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

Scales: 1H19 Preview — A Growing Business

Scales Corp Ltd

Scales: 1H19 Preview — A Growing Business