New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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.

Equity Bottom-Up

<div><div><div><div><ul><li>Scales' (SCL) business has changed materially over the past decade.</li><li>Global Proteins (primarily pet food ingredients supply) represents ~70% of our long-term NPAT forecasts from ~20% in FY19.</li><li>Investors typically argue that SCL's Global Proteins segment is opaque. </li></ul></div></div></div></div>

Scales' (SCL) business has changed materially over the past decade.Global Proteins (primarily pet food ingredients supply) represents ~70% of our long-term NPAT forecasts from ~20% in FY19.Investors typically argue that SCL's Global Proteins segment is opaque. 

<ul><li>Scales (SCL) reported a robust 1H24 result which was ahead of our expectations.</li><li>Key highlights were: (1) Horticulture margin improvements, (2) constructive medium-term Horticulture EBITDA commentary (ex. Profruit), and (3) robust Global Proteins execution (particularly volume growth).</li><li>FY24 earnings guidance was reaffirmed, and, in light of the strong 1H24 result and historically conservative guidance, we expect the midpoint will be exceeded. </li></ul>

Scales (SCL) reported a robust 1H24 result which was ahead of our expectations.Key highlights were: (1) Horticulture margin improvements, (2) constructive medium-term Horticulture EBITDA commentary (ex. Profruit), and (3) robust Global Proteins execution (particularly volume growth).FY24 earnings guidance was reaffirmed, and, in light of the strong 1H24 result and historically conservative guidance, we expect the midpoint will be exceeded. 

Scales - 1H24 Result — Increased Confidence

<ul><li>Scales (SCL) will report its 1H24 result on Wednesday, 28 August.</li><li>We expect it to report a solid return to profitability in its Horticulture division, and modest sequential growth within its Global Proteins division.</li><li>Key points of interest will be: (1) Global Proteins growth — we estimate mid-single digit EBITDA growth versus 2H23; (2) Horticulture margins — we forecast 14% pre-IFRS EBITDA margins in 1H24, a material improvement versus 1H23, but well down on the &gt;20% 1H margins delivered prior to FY22, and (3) FY24 guidance reiteration. </li></ul>

Scales (SCL) will report its 1H24 result on Wednesday, 28 August.We expect it to report a solid return to profitability in its Horticulture division, and modest sequential growth within its Global Proteins division.Key points of interest will be: (1) Global Proteins growth — we estimate mid-single digit EBITDA growth versus 2H23; (2) Horticulture margins — we forecast 14% pre-IFRS EBITDA margins in 1H24, a material improvement versus 1H23, but well down on the &gt;20% 1H margins delivered prior to FY22, and (3) FY24 guidance reiteration. 

Scales - 1H24 Preview — Well Positioned

<ul><li>We view Scales' (SCL) acquisition of (1) 240 hectares of primarily premium variety planted orchards (114 hectares owned and 126 hectares leased) from Bostock Group, and (2) the remaining 50% of juice concentrate manufacturer, Profruit (formerly owned by Bostock Group), favourably.</li><li>We estimate an implied EV/EBITDA (pre-IFRS 16) multiple of ~4x for the orchards component versus SCL's FY24 group multiple of ~6x.</li><li>SCL intends to sell two of its orchards and, based on recent transactional evidence, we foresee a reasonable likelihood that SCL on a net basis won't deploy any additional capital into Mr Apple. </li></ul>

We view Scales' (SCL) acquisition of (1) 240 hectares of primarily premium variety planted orchards (114 hectares owned and 126 hectares leased) from Bostock Group, and (2) the remaining 50% of juice concentrate manufacturer, Profruit (formerly owned by Bostock Group), favourably.We estimate an implied EV/EBITDA (pre-IFRS 16) multiple of ~4x for the orchards component versus SCL's FY24 group multiple of ~6x.SCL intends to sell two of its orchards and, based on recent transactional evidence, we foresee a reasonable likelihood that SCL on a net basis won't deploy any additional capital into Mr Apple. 

<ul><li>The global pet care market appears to be improving. While recent trends from global pet care companies have been relatively sluggish, their outlook comments painted a positive picture of: (1) expectations for a return to solid growth over the remainder of 2024, and (2) ongoing investment to support future growth, a combination of new product development and manufacturing investment.</li><li>We acknowledge the limitations when assessing results on a quarterly basis relative to Scales (SCL) given the lag impacts between SCL's volumes and customer revenue, along with the unknown inventory/market share impacts.</li><li>However, our analysis shows Nestle is a reasonable proxy and commentary is supportive for a return to growth for SCL's Global Proteins division. </li></ul>

The global pet care market appears to be improving. While recent trends from global pet care companies have been relatively sluggish, their outlook comments painted a positive picture of: (1) expectations for a return to solid growth over the remainder of 2024, and (2) ongoing investment to support future growth, a combination of new product development and manufacturing investment.We acknowledge the limitations when assessing results on a quarterly basis relative to Scales (SCL) given the lag impacts between SCL's volumes and customer revenue, along with the unknown inventory/market share impacts.However, our analysis shows Nestle is a reasonable proxy and commentary is supportive for a return to growth for SCL's Global Proteins division. 

New Zealand

Scales Corporation Limited is a New Zealand provider of essential supply chain services for primary exporters, importers and FMCG businesses. The Company's horticulture division involves the global exporting of apples while its storage and logistics division includes nationwide cold storage coverage and a logistics business specialising in sea and air freight of primary produce.

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Scales Corp Ltd (SCL NZ)

Scales - Scaling New Heights

Scales' (SCL) business has changed materially over the past decade. Global Proteins (primarily pet food ingredients supply) represents ~70%

Forsyth Barr

Scales - 1H24 Result — Increased Confidence

FY24 earnings guidance was reaffirmed, and, in light of the strong 1H24 result and historically conservative guidance, we expect the midpoint will...

Forsyth Barr

Scales - 1H24 Preview — Well Positioned

We expect it to report a solid return to profitability in its Horticulture division, and modest sequential growth within its Global Proteins division.

Forsyth Barr

Scales - How About Them Apples

We estimate an implied EV/EBITDA (pre-IFRS 16) multiple of ~4x for the orchards component versus SCL's FY24 group multiple of ~6x.

Forsyth Barr

Scales - Wagging Tails

While recent trends from global pet care companies have been relatively sluggish, their outlook comments painted a positive picture

Forsyth Barr

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