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

Warehouse Group Limited / Equity Bottom-Up

<h2>The Warehouse Group<br>A Faster Boat or Stronger Wind</h2>
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<p><strong>NEUTRAL</strong></p>
<p>The Warehouse (WHS) share price has had a strong run backed by a record trading performance, albeit boosted by an unprecedented favourable consumer backdrop. Discerning&nbsp;the specific contributions from underlying operational improvement and the favourable environment is difficult at this time, although we suspect it is more of the latter.&nbsp;WHS's&nbsp;transformation programme offers promise,&nbsp;however, with a lack of track record, competitive pressures and trading on a 24&nbsp;month forward PE ratio of 12x (a c. four year high), we see the risk reward as broadly fair. We reinstate full coverage on WHS with an NZ$3.75 target price&nbsp;and a NEUTRAL rating.</p>
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<h3>Record trading through FY21 boosted by backdrop</h3>
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<p>WHS has upgraded its 1H21 NPAT guidance three times in as many months, with the company benefitting from strong Christmas trading, low sector inventory, meaningful gross margin expansion, and operating leverage. WHS has guided to a record NPAT, in excess of NZ$110m. We view record trading as more likely a factor of the buoyant backdrop than underlying business improvement at this stage. With favourable operating conditions likely to remain in place in the short-term, we expect trading momentum to continue through 2H21.&nbsp;</p>
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<h3>Transformation programme execution provides upside</h3>
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<p>1H21 marks the first 12 month period since the completion of its Rise transformation programme. Any signs of tangible examples of cost out and growth opportunities are likely to provide confidence in the longer-term outlook, however, to date its track record has been mixed. WHS has meaningful upside should it be able to grow earnings through margin expansion. We estimate a sustainable +100bps increase to operating margins at Red Sheds has a c. +15% impact on our spot valuation. At this stage we expect margins to revert towards pre COVID-19 levels from FY22 given WHS's product mix and increasing competitive pressures. ​​​</p>
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<h3>Working capital improvements clear, balance sheet healthy</h3>
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<div id="m_1343826194846087793imtrtw">
<p>Whilst recent earnings performance drivers are difficult to separate, improvements on the balance sheet are clearer. WHS has guided to a net cash position of NZ$183m (FY20 NZ$168m) after having repaid the government wage subsidy of NZ$68m. Improved terms of trade and management of inventory are key enablers of its cash position and had begun to track in the right direction pre COVID-19, however, we do not see current inventory levels as sustainable. We expect to see some working capital reversion as inventory is rebuilt when supply chains normalise, albeit with some benefit from improved buying.&nbsp;</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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<div><strong>Ashton Olds CFA</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
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The Warehouse Group A Faster Boat or Stronger Wind

NEUTRAL
The Warehouse (WHS) share price has had a strong run backed by a record trading performance, albeit boosted by an unprecedented favourable consumer backdrop. Discerning&nbsp;the specific contributions from underlying operational improvement and the favourable environment is difficult at this time, although we suspect it is more of the latter.&nbsp;WHS's&nbsp;transformation programme offers promise,&nbsp;however, with a lack of track record, competitive pressures and trading on a 24&nbsp;month forward PE ratio of 12x (a c. four year high), we see the risk reward as broadly fair. We reinstate full coverage on WHS with an NZ$3.75 target price&nbsp;and a NEUTRAL rating.


Record trading through FY21 boosted by backdrop


WHS has upgraded its 1H21 NPAT guidance three times in as many months, with the company benefitting from strong Christmas trading, low sector inventory, meaningful gross margin expansion, and operating leverage. WHS has guided to a record NPAT, in excess of NZ$110m. We view record trading as more likely a factor of the buoyant backdrop than underlying business improvement at this stage. With favourable operating conditions likely to remain in place in the short-term, we expect trading momentum to continue through 2H21.&nbsp;


Transformation programme execution provides upside


1H21 marks the first 12 month period since the completion of its Rise transformation programme. Any signs of tangible examples of cost out and growth opportunities are likely to provide confidence in the longer-term outlook, however, to date its track record has been mixed. WHS has meaningful upside should it be able to grow earnings through margin expansion. We estimate a sustainable +100bps increase to operating margins at Red Sheds has a c. +15% impact on our spot valuation. At this stage we expect margins to revert towards pre COVID-19 levels from FY22 given WHS's product mix and increasing competitive pressures. ​​​


Working capital improvements clear, balance sheet healthy


Whilst recent earnings performance drivers are difficult to separate, improvements on the balance sheet are clearer. WHS has guided to a net cash position of NZ$183m (FY20 NZ$168m) after having repaid the government wage subsidy of NZ$68m. Improved terms of trade and management of inventory are key enablers of its cash position and had begun to track in the right direction pre COVID-19, however, we do not see current inventory levels as sustainable. We expect to see some working capital reversion as inventory is rebuilt when supply chains normalise, albeit with some benefit from improved buying.&nbsp;



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





Ashton Olds CFA
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



The Warehouse Group: A Faster Boat or Stronger Wind