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 Holdings</h2>
<p><strong>Delivering Through Disruption</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>Skellerup&nbsp;(SKL) has issued FY20 guidance ahead of our expectations, highlighting its agility to adjust to new operating conditions and the resilient nature of demand for a number of product lines.&nbsp;SKL's&nbsp;Agri&nbsp;business has been a highlight and although the Industrial division experienced a slow down, demand in recent months has rebounded stronger and faster than we would have expected. We lift our earnings forecasts in line with company guidance and increase our target price +NZ$0.05 to NZ$2.45. We reiterate our OUTPERFORM rating.</p>
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<h3>Guidance update — Demand strong and recovery faster than expected</h3>
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<p>SKL has issued FY20 guidance of "NPAT in excess of NZ$28m", +7.5% ahead of our prior forecasts, with the impact on demand and from operating restrictions being lower than expected to date.</p>
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<li><strong>Agri&nbsp;</strong>—&nbsp;SKL's&nbsp;Agri&nbsp;business is illustrating its resilience to the current economic disruption with demand for its products remaining strong.&nbsp;SKL's&nbsp;factories are considered essential and have therefore been able to operate through various&nbsp;lockdown&nbsp;policies, albeit with capacity constraints. Operational&nbsp;learnings&nbsp;have lifted productivity, and&nbsp;SKL&nbsp;is now operating at 90% of maximum capacity at its key&nbsp;Wigram&nbsp;factory.</li>
<li><strong>Industrial</strong> —&nbsp;The earnings profile in the Industrial division is more diverse, with the impact to date varied.&nbsp;Lockdown&nbsp;policies across markets and the slump in the oil and gas industry weighed on activity; however,&nbsp;SKL&nbsp;experienced&nbsp;strong demand for certain products and a faster than expected recovery in overall demand.</li>
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<h3>Outlook remains uncertain, however...</h3>
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<p>A high degree of uncertainty around&nbsp;COVID-19 and the ensuing economic fallout&nbsp;remains, with the key question being the impact to end customer demand.&nbsp;</p>
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<h3>... earnings exposure more resilient than it has been in the past</h3>
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<p>SKL's earnings exposure is more resilient to an uncertain economic environment than it has been in the past, in our view. Growth in the Industrial division has been driven by OEM (original equipment manufacturer) customers, whilst decreasing its business exposure to markets driven by commodity prices. SKL's operating model has improved, embedding itself into the OEM production process, supplying often critical products. We expect this to translate to a stickier customer relationship and more robust earnings streams. In its Agri division the bulk of its revenue is derived from the sale of quasi-consumable milking products such as liners and tubes, and as a result earnings tend to be more defensive. Although on farm capital spend remains a driver of sector earnings, we believe capital goods as a portion of total sales is lower than prior cycles, with less dairy conversion occurring.</p>
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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>
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Skellerup Holdings
Delivering Through Disruption
OUTPERFORM
Skellerup&nbsp;(SKL) has issued FY20 guidance ahead of our expectations, highlighting its agility to adjust to new operating conditions and the resilient nature of demand for a number of product lines.&nbsp;SKL's&nbsp;Agri&nbsp;business has been a highlight and although the Industrial division experienced a slow down, demand in recent months has rebounded stronger and faster than we would have expected. We lift our earnings forecasts in line with company guidance and increase our target price +NZ$0.05 to NZ$2.45. We reiterate our OUTPERFORM rating.


Guidance update — Demand strong and recovery faster than expected


SKL has issued FY20 guidance of "NPAT in excess of NZ$28m", +7.5% ahead of our prior forecasts, with the impact on demand and from operating restrictions being lower than expected to date.

Agri&nbsp;—&nbsp;SKL's&nbsp;Agri&nbsp;business is illustrating its resilience to the current economic disruption with demand for its products remaining strong.&nbsp;SKL's&nbsp;factories are considered essential and have therefore been able to operate through various&nbsp;lockdown&nbsp;policies, albeit with capacity constraints. Operational&nbsp;learnings&nbsp;have lifted productivity, and&nbsp;SKL&nbsp;is now operating at 90% of maximum capacity at its key&nbsp;Wigram&nbsp;factory.
Industrial —&nbsp;The earnings profile in the Industrial division is more diverse, with the impact to date varied.&nbsp;Lockdown&nbsp;policies across markets and the slump in the oil and gas industry weighed on activity; however,&nbsp;SKL&nbsp;experienced&nbsp;strong demand for certain products and a faster than expected recovery in overall demand.



Outlook remains uncertain, however...


A high degree of uncertainty around&nbsp;COVID-19 and the ensuing economic fallout&nbsp;remains, with the key question being the impact to end customer demand.&nbsp;


... earnings exposure more resilient than it has been in the past


SKL's earnings exposure is more resilient to an uncertain economic environment than it has been in the past, in our view. Growth in the Industrial division has been driven by OEM (original equipment manufacturer) customers, whilst decreasing its business exposure to markets driven by commodity prices. SKL's operating model has improved, embedding itself into the OEM production process, supplying often critical products. We expect this to translate to a stickier customer relationship and more robust earnings streams. In its Agri division the bulk of its revenue is derived from the sale of quasi-consumable milking products such as liners and tubes, and as a result earnings tend to be more defensive. Although on farm capital spend remains a driver of sector earnings, we believe capital goods as a portion of total sales is lower than prior cycles, with less dairy conversion occurring.




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




Skellerup Holdings: Delivering Through Disruption