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>Skellerup&nbsp;Holdings</h2>
1H20&nbsp;—&nbsp;Pipe Cracks, Milk Flows
 Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255&nbsp;
RESEARCH&nbsp;INSIGHTS
Skellerup&nbsp;(SKL) reported a slightly weaker than expected 1H20 result as trade tensions and a slowdown in key areas of its Industrial division weighed on the period. The&nbsp;Agri&nbsp;division maintained positive momentum, with a mixture of sales growth and operational efficiencies. However, growth is being driven in lower margin international markets, offsetting operational gains. Commentary suggests activity has picked up heading into the second half, with guidance implying a flat full year result. Consequently, we have lowered our forecasts, although remain cautious around ongoing macroeconomic risks.
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SKL</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.27</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">29.1</td>
<td style="text-align: left; width: 48pt;">28.7</td>
<td style="text-align: left; width: 48pt;">30.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">30.7</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">9.6</td>
<td style="text-align: left; width: 48pt;">8.7</td>
<td style="text-align: left; width: 48pt;">8.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.3</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">192.8m</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">14.9</td>
<td style="text-align: left; width: 48pt;">14.7</td>
<td style="text-align: left; width: 48pt;">15.4</td>
<td style="text-align: left; width: 48pt;">15.7</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">11.3</td>
<td style="text-align: left; width: 48pt;">11.1</td>
<td style="text-align: left; width: 48pt;">10.6</td>
<td style="text-align: left; width: 48pt;">10.4</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$438m</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">5.5</td>
<td style="text-align: left; width: 48pt;">-1.3</td>
<td style="text-align: left; width: 48pt;">4.6</td>
<td style="text-align: left; width: 48pt;">2.3</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">15.2</td>
<td style="text-align: left; width: 48pt;">15.4</td>
<td style="text-align: left; width: 48pt;">14.7</td>
<td style="text-align: left; width: 48pt;">14.4</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">158.0k (NZ$361k)</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">13.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">13.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">13.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">14.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">3.4</td>
<td style="text-align: left; width: 48pt;">3.3</td>
<td style="text-align: left; width: 48pt;">3.2</td>
<td style="text-align: left; width: 48pt;">3.1</td>
</tr>
<tr>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">50</td>
<td style="text-align: left; width: 48pt;">50</td>
<td style="text-align: left; width: 48pt;">50</td>
<td style="text-align: left; width: 48pt;">50</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">5.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">6.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.4&nbsp;</td>
</tr>
</tbody>
</table>
1H20 result&nbsp;— key points
<ul type="disc">
<li>Industrial slow down —&nbsp;The industrial division had a relatively disappointing 1H20E, reporting a headline -15% drop in&nbsp;EBIT, as multiple market segments experienced weakness. Weighing on the result was a slowdown in US infrastructure projects, oil exploration, and the European automotive market. Commentary suggests activity has subsequently picked up, with the second half expected to return to growth. We have tempered our expectations for the Industrial division.&nbsp;</li>
<li>Agri&nbsp;growing offshore —&nbsp;On the positive side, the&nbsp;Agri&nbsp;division has delivered strong growth, driven by increased sales into the US market&nbsp;which was buoyed by lower feed costs and a higher milk price. Although international growth is generally lower margin (freight costs and lower level of own brand sales), operational gains at its​​​​​​​&nbsp;Wigram&nbsp;facility helped reduce costs and maintain margins. We expect earnings growth in this business will be hard to replicate and continue to see headwinds for dairy production domestically, but are encouraged by traction in international markets and opportunities recent acquisition&nbsp;Silclear&nbsp;could unlock.</li>
</ul>
Outlook flat, small negative earnings revisions
SKL&nbsp;provided first time full year guidance of FY20E&nbsp;NPAT&nbsp;“consistent with the result achieved in the prior comparable period” or&nbsp;~NZ$29m, we have tempered our forecasts slightly, down -NZ$1.1m to NZ$28.7m. The company has indicated a strong start to the second half, with year to date&nbsp;NPAT&nbsp;ahead of the prior comparable period. However, we continue to see risk from ongoing trade tensions, headwinds for domestic dairy production, and possible&nbsp;coronavirus&nbsp;related impacts.
1H20 is the first earnings period following the adoption of&nbsp;IFRS&nbsp;16 treatment of leases. With prior year numbers not having been restated, it makes direct comparisons difficult at the&nbsp;EBITDA&nbsp;line in particular. The impact of&nbsp;IFRS&nbsp;16 on the half is not material, with a ~-NZ$0.1m impact to reported&nbsp;NPAT. We expect the full year impact to be ~-NZ$0.2m and have incorporated that in earnings estimates going forward.

Skellerup&nbsp;Holdings
1H20&nbsp;—&nbsp;Pipe Cracks, Milk Flows
 Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255&nbsp;
RESEARCH&nbsp;INSIGHTS
Skellerup&nbsp;(SKL) reported a slightly weaker than expected 1H20 result as trade tensions and a slowdown in key areas of its Industrial division weighed on the period. The&nbsp;Agri&nbsp;division maintained positive momentum, with a mixture of sales growth and operational efficiencies. However, growth is being driven in lower margin international markets, offsetting operational gains. Commentary suggests activity has picked up heading into the second half, with guidance implying a flat full year result. Consequently, we have lowered our forecasts, although remain cautious around ongoing macroeconomic risks.



NZX Code
SKL
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$2.27
NPAT* (NZ$m)
29.1
28.7
30.0&nbsp;
30.7
EV/EBITDA
9.6
8.7
8.4&nbsp;
8.3


Issued shares
192.8m
EPS* (NZc)
14.9
14.7
15.4
15.7
EV/EBIT
11.3
11.1
10.6
10.4


Market cap
NZ$438m
EPS growth* (%)
5.5
-1.3
4.6
2.3
PE
15.2
15.4
14.7
14.4


Avg daily turnover
158.0k (NZ$361k)
DPS (NZc)
13.0&nbsp;
13.0&nbsp;
13.5&nbsp;
14.0&nbsp;
Price/NTA
3.4
3.3
3.2
3.1




Imputation (%)
50
50
50
50
Cash div yld (%)
5.7&nbsp;
5.7&nbsp;
5.9&nbsp;
6.2&nbsp;




*Based on normalised profits


Gross div yld (%)
6.8&nbsp;
6.8&nbsp;
7.1&nbsp;
7.4&nbsp;



1H20 result&nbsp;— key points

Industrial slow down —&nbsp;The industrial division had a relatively disappointing 1H20E, reporting a headline -15% drop in&nbsp;EBIT, as multiple market segments experienced weakness. Weighing on the result was a slowdown in US infrastructure projects, oil exploration, and the European automotive market. Commentary suggests activity has subsequently picked up, with the second half expected to return to growth. We have tempered our expectations for the Industrial division.&nbsp;
Agri&nbsp;growing offshore —&nbsp;On the positive side, the&nbsp;Agri&nbsp;division has delivered strong growth, driven by increased sales into the US market&nbsp;which was buoyed by lower feed costs and a higher milk price. Although international growth is generally lower margin (freight costs and lower level of own brand sales), operational gains at its​​​​​​​&nbsp;Wigram&nbsp;facility helped reduce costs and maintain margins. We expect earnings growth in this business will be hard to replicate and continue to see headwinds for dairy production domestically, but are encouraged by traction in international markets and opportunities recent acquisition&nbsp;Silclear&nbsp;could unlock.

Outlook flat, small negative earnings revisions
SKL&nbsp;provided first time full year guidance of FY20E&nbsp;NPAT&nbsp;“consistent with the result achieved in the prior comparable period” or&nbsp;~NZ$29m, we have tempered our forecasts slightly, down -NZ$1.1m to NZ$28.7m. The company has indicated a strong start to the second half, with year to date&nbsp;NPAT&nbsp;ahead of the prior comparable period. However, we continue to see risk from ongoing trade tensions, headwinds for domestic dairy production, and possible&nbsp;coronavirus&nbsp;related impacts.
1H20 is the first earnings period following the adoption of&nbsp;IFRS&nbsp;16 treatment of leases. With prior year numbers not having been restated, it makes direct comparisons difficult at the&nbsp;EBITDA&nbsp;line in particular. The impact of&nbsp;IFRS&nbsp;16 on the half is not material, with a ~-NZ$0.1m impact to reported&nbsp;NPAT. We expect the full year impact to be ~-NZ$0.2m and have incorporated that in earnings estimates going forward.

Skellerup Holdings: 1H20 — Pipe Cracks, Milk Flows