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<br>On Track to an NZ$1bn Valuation</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>We continue to view&nbsp;Skellerup&nbsp;(SKL) as offering attractive value at current multiples, given 1) its discount to international peers, 2) continued execution on its pipeline of growth opportunities, and 3) as it benefits from a favourable operating backdrop. SKL’s shift to focus on OEM (original equipment manufacturer) customers has improved its earnings resilience, a factor not lost on the market, having experienced meaningful multiple expansion. In this report we explore the drivers of recent performance and its valuation relative to international industrial peers with similar operating traits. OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>​​​​​​​Target price</strong>:&nbsp;​​​​​​We increase our target price +40cps (+8%) to NZ$5.15&nbsp;on the back of peer multiple analysis.</li>
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<h3>Operating backdrop remains favourable</h3>
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<p>SKL's&nbsp;FY21 earnings guidance implies +31% year on year growth at the mid-point, which we estimate is based on an +8% increase in sales. Encouragingly,&nbsp;margin expansion&nbsp;achieved in 1H21 has been largely maintained in 2H21, despite rising cost pressures, providing further confidence in its sustainability.&nbsp;Although&nbsp;cost pressures have worsened since&nbsp;SKL's&nbsp;last update in April, we expect these to have been largely offset through pricing power and ongoing strength in key markets. Worsening of freight route reliability creates slight downside to our FY21&nbsp;forecasts, albeit this should be a timing issue, with its pipeline of growth opportunities supporting attractive near-term earnings growth.</p>
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<h3>Meaningful multiple expansion, but is it fair?</h3>
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<p>SKL has experienced a period of strong share price performance, driven by a combination of earnings growth and significant multiple expansion. Over the past 12 months, SKL's share price has increased +127%, while its 12 month forward PE has gone from 13x to 21x (+58%). We believe multiple expansion is justified with the key drivers, in our opinion, having been 1) its increased focus on supplying OEM (original equipment manufacturer) customers which tend to offer more resilient earnings base, 2) strong earnings performance and consensus upgrades, and 3) lower interest rates driving a hunt for yield and compressing cost of capital.</p>
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<h3>Finding the right comp set — SKL continues to trade at a discount</h3>
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<p>SKL's distinct products and diverse customer set creates a valuation challenge when attempting to benchmark against peers. Rather than focus on earnings exposure, we believe companies with a similar operating model provide a better basis for comparison. We have compiled a list of more suitable peers, which over the past 10 years have shown a consistant forward multiple correlation with SKL. SKL trades at a discount to peers, and whilst this has narrowed, it offers superior returns and earnings metrics suggesting room for further valuation upside. We incorporate this peer analysis in deriving our target price and it is the primary driver behind the increase.</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 On Track to an NZ$1bn Valuation

OUTPERFORM
We continue to view&nbsp;Skellerup&nbsp;(SKL) as offering attractive value at current multiples, given 1) its discount to international peers, 2) continued execution on its pipeline of growth opportunities, and 3) as it benefits from a favourable operating backdrop. SKL’s shift to focus on OEM (original equipment manufacturer) customers has improved its earnings resilience, a factor not lost on the market, having experienced meaningful multiple expansion. In this report we explore the drivers of recent performance and its valuation relative to international industrial peers with similar operating traits. OUTPERFORM.


What's changed?&nbsp;



​​​​​​​Target price:&nbsp;​​​​​​We increase our target price +40cps (+8%) to NZ$5.15&nbsp;on the back of peer multiple analysis.



Operating backdrop remains favourable


SKL's&nbsp;FY21 earnings guidance implies +31% year on year growth at the mid-point, which we estimate is based on an +8% increase in sales. Encouragingly,&nbsp;margin expansion&nbsp;achieved in 1H21 has been largely maintained in 2H21, despite rising cost pressures, providing further confidence in its sustainability.&nbsp;Although&nbsp;cost pressures have worsened since&nbsp;SKL's&nbsp;last update in April, we expect these to have been largely offset through pricing power and ongoing strength in key markets. Worsening of freight route reliability creates slight downside to our FY21&nbsp;forecasts, albeit this should be a timing issue, with its pipeline of growth opportunities supporting attractive near-term earnings growth.


Meaningful multiple expansion, but is it fair?


SKL has experienced a period of strong share price performance, driven by a combination of earnings growth and significant multiple expansion. Over the past 12 months, SKL's share price has increased +127%, while its 12 month forward PE has gone from 13x to 21x (+58%). We believe multiple expansion is justified with the key drivers, in our opinion, having been 1) its increased focus on supplying OEM (original equipment manufacturer) customers which tend to offer more resilient earnings base, 2) strong earnings performance and consensus upgrades, and 3) lower interest rates driving a hunt for yield and compressing cost of capital.


Finding the right comp set — SKL continues to trade at a discount


SKL's distinct products and diverse customer set creates a valuation challenge when attempting to benchmark against peers. Rather than focus on earnings exposure, we believe companies with a similar operating model provide a better basis for comparison. We have compiled a list of more suitable peers, which over the past 10 years have shown a consistant forward multiple correlation with SKL. SKL trades at a discount to peers, and whilst this has narrowed, it offers superior returns and earnings metrics suggesting room for further valuation upside. We incorporate this peer analysis in deriving our target price and it is the primary driver behind the increase.




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




Skellerup Holdings: On Track to an NZ$1bn Valuation