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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Skellerup Holdings<br>Strong Start to the Year</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Skellerup (SKL) has provided a positive trading update at its annual shareholders meeting (ASM), indicating that demand remains strong across the majority of the business despite ongoing COVID-19 challenges. Whilst no specific guidance was provided, management indicated that 1H22 NPAT is expected to be "in excess of 10%" above 1H21, and that the strong operating environment is expected to continue. We have lifted our medium term earnings expectations reflecting continued robust demand and further margin benefits. We remain attracted to SKL's solid growth outlook, capital light growth model, and ungeared balance sheet. Retain OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;We make slight adjustments to our FY22 NPAT forecast (+1%) and expect +15% earnings growth which is broadly in line with today's 1H22 guidance. We increase our&nbsp;FY23E and&nbsp;FY24E forecasts +4% and +7% respectively reflecting more sustained demand as well as operating leverage and efficiencies&nbsp;benefitting&nbsp;margins.</li>
<li><strong>Target price</strong>:&nbsp;We increase our&nbsp;target price&nbsp;+40cps to NZ$6.30, reflecting our increased medium term earnings expectations and no meaningful changes to peer multiples.</li>
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<h3>Strong demand momentum continues</h3>
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<p>SKL continues to experience robust demand across its businesses&nbsp;following on from a strong FY21 result.&nbsp;SKL's&nbsp;shift to an&nbsp;OEM (original equipment manufacturer) focus has helped ensure resilient earnings, while additional contract wins and recent delivery on operational projects provide confidence in continued margin improvement (FY21 EBITDA margin lifted +260bp). As such we model further improvements in margins over our forecast period (was flat after a step up in FY22) as well as&nbsp;sustained top line growth as supply continues to catch up with robust post pandemic demand. Macro indicators remain favourable with high levels of construction activity&nbsp;in Australia, favourable dairy prices, and heightened demand for recreational marine foam.</p>
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<h3>Balance sheet has plenty of capacity</h3>
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<p>SKL's&nbsp;net debt/EBITDA had fallen to 0.1x at its FY21 result&nbsp;and our model suggests SKL will be in net cash position by FY23.&nbsp;SKL's&nbsp;capital light organic growth model and healthy balance sheet provides&nbsp;optionality&nbsp;to pursue bolt-on acquisitions. Acquisitive growth is a key lever for SKL and an area it has had recent success in. The company has previously signalled a desire for a manufacturing presence in North America and the slow&nbsp;easing of&nbsp;travel restrictions will make it easier to "kick the tyres" on potential targets.&nbsp;&nbsp;</p>
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Skellerup Holdings Strong Start to the Year

OUTPERFORM
Skellerup (SKL) has provided a positive trading update at its annual shareholders meeting (ASM), indicating that demand remains strong across the majority of the business despite ongoing COVID-19 challenges. Whilst no specific guidance was provided, management indicated that 1H22 NPAT is expected to be "in excess of 10%" above 1H21, and that the strong operating environment is expected to continue. We have lifted our medium term earnings expectations reflecting continued robust demand and further margin benefits. We remain attracted to SKL's solid growth outlook, capital light growth model, and ungeared balance sheet. Retain OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;We make slight adjustments to our FY22 NPAT forecast (+1%) and expect +15% earnings growth which is broadly in line with today's 1H22 guidance. We increase our&nbsp;FY23E and&nbsp;FY24E forecasts +4% and +7% respectively reflecting more sustained demand as well as operating leverage and efficiencies&nbsp;benefitting&nbsp;margins.
Target price:&nbsp;We increase our&nbsp;target price&nbsp;+40cps to NZ$6.30, reflecting our increased medium term earnings expectations and no meaningful changes to peer multiples.



Strong demand momentum continues


SKL continues to experience robust demand across its businesses&nbsp;following on from a strong FY21 result.&nbsp;SKL's&nbsp;shift to an&nbsp;OEM (original equipment manufacturer) focus has helped ensure resilient earnings, while additional contract wins and recent delivery on operational projects provide confidence in continued margin improvement (FY21 EBITDA margin lifted +260bp). As such we model further improvements in margins over our forecast period (was flat after a step up in FY22) as well as&nbsp;sustained top line growth as supply continues to catch up with robust post pandemic demand. Macro indicators remain favourable with high levels of construction activity&nbsp;in Australia, favourable dairy prices, and heightened demand for recreational marine foam.


Balance sheet has plenty of capacity


SKL's&nbsp;net debt/EBITDA had fallen to 0.1x at its FY21 result&nbsp;and our model suggests SKL will be in net cash position by FY23.&nbsp;SKL's&nbsp;capital light organic growth model and healthy balance sheet provides&nbsp;optionality&nbsp;to pursue bolt-on acquisitions. Acquisitive growth is a key lever for SKL and an area it has had recent success in. The company has previously signalled a desire for a manufacturing presence in North America and the slow&nbsp;easing of&nbsp;travel restrictions will make it easier to "kick the tyres" on potential targets.&nbsp;&nbsp;


Skellerup Holdings: Strong Start to the Year