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

<h2>Equity Strategy</h2>
Institutional Model Portfolio
The near term outlook for both economic activity and markets remain highly uncertain, despite the spread of COVID-19 showing signs of peaking domestically and in Europe. Companies are looking to (1) lower costs to mitigate the current demand shock while in preparation for the uncertainty ahead, and (2) protect their balance sheets from the wrath of lenders. Consequently, a tidal wave of equity raisings has begun, with Kathmandu (KMD) and Auckland Airport (AIA) quickly out of the blocks. We think it likely that others will follow. In addition to being called on to contribute more capital, investors will likely have to share the pain of lower profits through dividend cuts. Our portfolio is largely devoid of companies exposed to capital raise risk and we favour those stocks that will likely maintain distributions to shareholders. To concentrate our exposure to this theme, we upweight our already overweight positions in the utilities and telco sectors. ​​​​​​​
Safety bias with yield benefit
We prefer defensive, yielding names for a variety of reasons: (1) ultra-low interest rates are here for the foreseeable future. Central banks with be lethargic to anything but rampant inflation. (2) ​​​​​​​Investor demand for income will increase not diminish. (3) ​​​​​​​The supply of safe, income generating, options is falling. A large number of companies are undergoing dividend holidays. For many, dividends will not resume quickly given recessionary demand impacting earnings, the need to rebuild balance sheets, and potential need to invest to reinforce vulnerable supply chains.&nbsp;
Portfolio changes; increasing exposure to&nbsp;gentailers,&nbsp;SPK&nbsp;and&nbsp;RYM
We add to our existing positions in each of the four large&nbsp;gentailers&nbsp;— Contact (CEN), Meridian (MEL), Mercury (MCY) and&nbsp;Genesis (GNE)&nbsp;— to extend our already overweight sector call, despite&nbsp;Tiwai&nbsp;closure risk, which we continue to believe is overplayed.&nbsp;We also add to our overweight position in Spark (SPK), and move to overweight in&nbsp;Ryman&nbsp;(RYM) given its heavy needs based product, which should ultimately benefit from COVID-19.&nbsp;
Exiting&nbsp;KPG, AIR, and beginning staged exit from&nbsp;NZK
We remove Kiwi Property (KPG) from the portfolio given the considerable uncertainty over its retail assets near-term and upcoming portfolio revaluations. We also remove Air New Zealand (AIR) to reflect its challenged outlook and need for new equity to replace debt. Lastly we begin a staged exit (because of liquidity reasons) from NZ King Salmon (NZK) given the likely social distancing risks attached to its higher margin food service channel, even in a post-lockdown world.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Liam Donnelly liam.donnelly@forsythbarr.co.nz +64 4 495 8194&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz

Equity Strategy
Institutional Model Portfolio
The near term outlook for both economic activity and markets remain highly uncertain, despite the spread of COVID-19 showing signs of peaking domestically and in Europe. Companies are looking to (1) lower costs to mitigate the current demand shock while in preparation for the uncertainty ahead, and (2) protect their balance sheets from the wrath of lenders. Consequently, a tidal wave of equity raisings has begun, with Kathmandu (KMD) and Auckland Airport (AIA) quickly out of the blocks. We think it likely that others will follow. In addition to being called on to contribute more capital, investors will likely have to share the pain of lower profits through dividend cuts. Our portfolio is largely devoid of companies exposed to capital raise risk and we favour those stocks that will likely maintain distributions to shareholders. To concentrate our exposure to this theme, we upweight our already overweight positions in the utilities and telco sectors. ​​​​​​​
Safety bias with yield benefit
We prefer defensive, yielding names for a variety of reasons: (1) ultra-low interest rates are here for the foreseeable future. Central banks with be lethargic to anything but rampant inflation. (2) ​​​​​​​Investor demand for income will increase not diminish. (3) ​​​​​​​The supply of safe, income generating, options is falling. A large number of companies are undergoing dividend holidays. For many, dividends will not resume quickly given recessionary demand impacting earnings, the need to rebuild balance sheets, and potential need to invest to reinforce vulnerable supply chains.&nbsp;
Portfolio changes; increasing exposure to&nbsp;gentailers,&nbsp;SPK&nbsp;and&nbsp;RYM
We add to our existing positions in each of the four large&nbsp;gentailers&nbsp;— Contact (CEN), Meridian (MEL), Mercury (MCY) and&nbsp;Genesis (GNE)&nbsp;— to extend our already overweight sector call, despite&nbsp;Tiwai&nbsp;closure risk, which we continue to believe is overplayed.&nbsp;We also add to our overweight position in Spark (SPK), and move to overweight in&nbsp;Ryman&nbsp;(RYM) given its heavy needs based product, which should ultimately benefit from COVID-19.&nbsp;
Exiting&nbsp;KPG, AIR, and beginning staged exit from&nbsp;NZK
We remove Kiwi Property (KPG) from the portfolio given the considerable uncertainty over its retail assets near-term and upcoming portfolio revaluations. We also remove Air New Zealand (AIR) to reflect its challenged outlook and need for new equity to replace debt. Lastly we begin a staged exit (because of liquidity reasons) from NZ King Salmon (NZK) given the likely social distancing risks attached to its higher margin food service channel, even in a post-lockdown world.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Liam Donnelly liam.donnelly@forsythbarr.co.nz +64 4 495 8194&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz

Equity Strategy: Institutional Model Portfolio

<h2>Equity Strategy&nbsp;</h2>
The Dividend&nbsp;Hit Has Only Just Started&nbsp;
The politics of dividend distribution will heavily influence how corporates navigate capital management decisions as a result of COVID-19. In an environment where workers are being made redundant or being paid only a proportion of wages, where government's are providing wage subsidies, and where supplier contractual relief is happening, distributions to shareholders will need to be carefully considered by boards. Consequently, even in a lower earnings environment, we expect pay-out ratios to fall from recent elevated levels. Investors will likely receive less income for the foreseeable future. While dividends are an instrument of wealth distribution rather than wealth creation, lower bond rates and changes to bank funding requirements mean lower term deposit rates, which means dividends (where possible) will be highly valued by yield thirsty investors, in our view. This theme is, therefore, supportive to those dividend payers with relative COVID-19 immunity —​​​​​​​ in particular, utilities (Contact, Genesis, Meridian, Mercury, Trustpower, Vector) and telcos (Chorus, Spark).&nbsp;&nbsp;
Pay-out ratios have been climbing; NZ high relative to other markets&nbsp;
Over the past 10 years median pay-out ratios for the&nbsp;NZX50 have&nbsp;climbed from the&nbsp;low 70s to the low 80s. We accept that compositional changes have occurred but even taking into account new arrivals and share market departures, the same trend is visible. Pay-out ratios have increased&nbsp;but similar to what was observed through the&nbsp;GFC&nbsp;are&nbsp;now set to decline sharply.&nbsp;&nbsp;
Figure 1. Median divi pay-out ratio history for the S&amp;P/NZX50
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/389/original/image_44603735221585972078121.png?1585972077" class="editor-image img-responsive" data-smartkarma-image-id="126389"></figure>
Source: Forsyth Barr analysis
Figure 2. NZ pay-out rates are very high versus other markets 
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/392/original/image_30732839841585972139551.png?1585972138" class="editor-image img-responsive"></figure>
Source: Bloomberg, Forsyth Barr analysis
Dividends on hold
The host of dividend suspensions in the February reporting season reflect cash preservation for companies exposed to COVID-19 challenges more than the politics, but sets the scene for further suspensions over the next 12 months. Separately, the RBNZ has said that locally incorporated banks cannot pay dividends on ordinary shares and should not redeem capital notes, to further support the stability of the banking financial system during this period of economic uncertainty. Moreover, last week the European Central Bank (ECB) called on banks across the euro zone to refrain from dividend payments and share buybacks.
Good corporate citizenship will be a critical factor for navigating COVID-19
Companies that effectively balance the social good over shareholder distributions and profits will better navigate COVID-19 than those that don't, in our view.&nbsp;This may mean a greater impact than otherwise on near term profitability, but good corporate citizenship will likely have a longer lasting impact on labour productivity/retention, customer/brand loyalty and supplier relationships.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464

Equity Strategy&nbsp;
The Dividend&nbsp;Hit Has Only Just Started&nbsp;
The politics of dividend distribution will heavily influence how corporates navigate capital management decisions as a result of COVID-19. In an environment where workers are being made redundant or being paid only a proportion of wages, where government's are providing wage subsidies, and where supplier contractual relief is happening, distributions to shareholders will need to be carefully considered by boards. Consequently, even in a lower earnings environment, we expect pay-out ratios to fall from recent elevated levels. Investors will likely receive less income for the foreseeable future. While dividends are an instrument of wealth distribution rather than wealth creation, lower bond rates and changes to bank funding requirements mean lower term deposit rates, which means dividends (where possible) will be highly valued by yield thirsty investors, in our view. This theme is, therefore, supportive to those dividend payers with relative COVID-19 immunity —​​​​​​​ in particular, utilities (Contact, Genesis, Meridian, Mercury, Trustpower, Vector) and telcos (Chorus, Spark).&nbsp;&nbsp;
Pay-out ratios have been climbing; NZ high relative to other markets&nbsp;
Over the past 10 years median pay-out ratios for the&nbsp;NZX50 have&nbsp;climbed from the&nbsp;low 70s to the low 80s. We accept that compositional changes have occurred but even taking into account new arrivals and share market departures, the same trend is visible. Pay-out ratios have increased&nbsp;but similar to what was observed through the&nbsp;GFC&nbsp;are&nbsp;now set to decline sharply.&nbsp;&nbsp;
Figure 1. Median divi pay-out ratio history for the S&amp;P/NZX50

Source: Forsyth Barr analysis
Figure 2. NZ pay-out rates are very high versus other markets 

Source: Bloomberg, Forsyth Barr analysis
Dividends on hold
The host of dividend suspensions in the February reporting season reflect cash preservation for companies exposed to COVID-19 challenges more than the politics, but sets the scene for further suspensions over the next 12 months. Separately, the RBNZ has said that locally incorporated banks cannot pay dividends on ordinary shares and should not redeem capital notes, to further support the stability of the banking financial system during this period of economic uncertainty. Moreover, last week the European Central Bank (ECB) called on banks across the euro zone to refrain from dividend payments and share buybacks.
Good corporate citizenship will be a critical factor for navigating COVID-19
Companies that effectively balance the social good over shareholder distributions and profits will better navigate COVID-19 than those that don't, in our view.&nbsp;This may mean a greater impact than otherwise on near term profitability, but good corporate citizenship will likely have a longer lasting impact on labour productivity/retention, customer/brand loyalty and supplier relationships.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464

Equity Strategy: The Dividend Hit Has Only Just Started 

<h2>Conviction List</h2>
Add&nbsp;Infratil&nbsp;(IFT),&nbsp;SKYCITY&nbsp;(SKC), Spark (SPK), and&nbsp;Summerset&nbsp;(SUM)
We double the size of our conviction list from four to eight stocks with the addition of Infratil (IFT), SKYCITY (SKC), Spark (SPK) and Summerset (SUM). These additions provide greater diversification in a time of elevated volatility and market uncertainty, and greater exposure to a market recovery. Our conviction list now reflects a mixture of defensive cash-flow streams (CEN, IFT, SPK), consumer growth stories (ATM, SAN), aged care — where the downside risks have been overplayed and the sector could be a longer term beneficiary of COVID-19 (ARV, SUM), and one recovery play (SKC).
Rolling performance
Over the past 12 months the Conviction List has outperformed the NZX50 by +9.0% (up +6.9% vs. the S&amp;P/NZX50 down -2.1%). Since inception on 1 October 2016, it has outperformed by +43.9% (up +78.4% vs. the S&amp;P/NZX50 up +34.6%).
Add&nbsp;Infratil&nbsp;(IFT.NZ; OUTPERFORM)
We believe IFT is one of those stocks that has been oversold. IFT's investments are all defensive in nature and deemed essential services. CDC Data Centres and Vodafone are likely to be experiencing increased demand, Trustpower and Tilt Renewables are very defensive assets that will perform well during an economic downturn. These four investments represent 80% of its portfolio. The only investment under pressure is Wellington Airport (WIAL), however, we believe it has sufficient debt capacity (as does IFT) to deal with the downturn. In addition, 85% of WIAL's travellers are domestic, which we expect will recover faster than international.
Add&nbsp;SKYCITY&nbsp;(SKC.NZ; OUTPERFORM)
We add&nbsp;SKC&nbsp;to provide an exposure within the conviction list to the domestic recovery. Being definitive on the&nbsp;timeline&nbsp;is near impossible, however,&nbsp;SKC&nbsp;is predominantly a domestic grind business so well placed whenever we do get through the disruption period. There will clearly be a large near-term earnings shock and we acknowledge material near-term risks, however, the share price correction is out of step with any magnitude of scenarios around the risk, in our view. We believe&nbsp;SKC&nbsp;can navigate COVID-19 (admittedly with some battle scars), with its asset base and long-term monopoly casino licences providing some comfort of value above current market pricing.
Add Spark (SPK.NZ; OUTPERFORM)
We view&nbsp;telcos&nbsp;as one of the most&nbsp;defensive&nbsp;sectors in the current environment. The sector's revenue was resilient through the Global Financial Crisis, and today you have the added demand boost from people self-isolating in homes.&nbsp;SPK&nbsp;offers investors an attractive income yield, with the added&nbsp;defensive&nbsp;benefit of a strong A- balance sheet. Once the COVID-19 storm eventually settles, we expect we will be in a world of even lower interest rates and investors back searching for income.
Add&nbsp;Summerset&nbsp;(<a href="http://sum.nz/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://SUM.NZ&amp;source=gmail&amp;ust=1585613741752000&amp;usg=AFQjCNHWCS77Twa5183JWWMoRAGHJzBdYw" rel="noopener">SUM.NZ</a>; OUTPERFORM)
We add SUM to the conviction list following its recent de-rating. Since the outbreak of COVID-19 SUM is down -40% off its February peak. While we acknowledge the risk the virus poses to the elderly, we believe that the market has priced in a very gloomy scenario related to the outbreak. In our view, SUM, along with other major retirement/aged care operators, are well equipped to handle infectious diseases and look after its residents. At current pricing SUM is getting little credit for its development track record and pipeline.
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464

Conviction List
Add&nbsp;Infratil&nbsp;(IFT),&nbsp;SKYCITY&nbsp;(SKC), Spark (SPK), and&nbsp;Summerset&nbsp;(SUM)
We double the size of our conviction list from four to eight stocks with the addition of Infratil (IFT), SKYCITY (SKC), Spark (SPK) and Summerset (SUM). These additions provide greater diversification in a time of elevated volatility and market uncertainty, and greater exposure to a market recovery. Our conviction list now reflects a mixture of defensive cash-flow streams (CEN, IFT, SPK), consumer growth stories (ATM, SAN), aged care — where the downside risks have been overplayed and the sector could be a longer term beneficiary of COVID-19 (ARV, SUM), and one recovery play (SKC).
Rolling performance
Over the past 12 months the Conviction List has outperformed the NZX50 by +9.0% (up +6.9% vs. the S&amp;P/NZX50 down -2.1%). Since inception on 1 October 2016, it has outperformed by +43.9% (up +78.4% vs. the S&amp;P/NZX50 up +34.6%).
Add&nbsp;Infratil&nbsp;(IFT.NZ; OUTPERFORM)
We believe IFT is one of those stocks that has been oversold. IFT's investments are all defensive in nature and deemed essential services. CDC Data Centres and Vodafone are likely to be experiencing increased demand, Trustpower and Tilt Renewables are very defensive assets that will perform well during an economic downturn. These four investments represent 80% of its portfolio. The only investment under pressure is Wellington Airport (WIAL), however, we believe it has sufficient debt capacity (as does IFT) to deal with the downturn. In addition, 85% of WIAL's travellers are domestic, which we expect will recover faster than international.
Add&nbsp;SKYCITY&nbsp;(SKC.NZ; OUTPERFORM)
We add&nbsp;SKC&nbsp;to provide an exposure within the conviction list to the domestic recovery. Being definitive on the&nbsp;timeline&nbsp;is near impossible, however,&nbsp;SKC&nbsp;is predominantly a domestic grind business so well placed whenever we do get through the disruption period. There will clearly be a large near-term earnings shock and we acknowledge material near-term risks, however, the share price correction is out of step with any magnitude of scenarios around the risk, in our view. We believe&nbsp;SKC&nbsp;can navigate COVID-19 (admittedly with some battle scars), with its asset base and long-term monopoly casino licences providing some comfort of value above current market pricing.
Add Spark (SPK.NZ; OUTPERFORM)
We view&nbsp;telcos&nbsp;as one of the most&nbsp;defensive&nbsp;sectors in the current environment. The sector's revenue was resilient through the Global Financial Crisis, and today you have the added demand boost from people self-isolating in homes.&nbsp;SPK&nbsp;offers investors an attractive income yield, with the added&nbsp;defensive&nbsp;benefit of a strong A- balance sheet. Once the COVID-19 storm eventually settles, we expect we will be in a world of even lower interest rates and investors back searching for income.
Add&nbsp;Summerset&nbsp;(SUM.NZ; OUTPERFORM)
We add SUM to the conviction list following its recent de-rating. Since the outbreak of COVID-19 SUM is down -40% off its February peak. While we acknowledge the risk the virus poses to the elderly, we believe that the market has priced in a very gloomy scenario related to the outbreak. In our view, SUM, along with other major retirement/aged care operators, are well equipped to handle infectious diseases and look after its residents. At current pricing SUM is getting little credit for its development track record and pipeline.
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464


 Conviction List: Add Infratil (IFT), SKYCITY (SKC), Spark (SPK), and Summerset (SUM)

<h2>Equity Strategy</h2>
COVID-19 Winners, Losers, and Big Losers&nbsp;
The impact of&nbsp;COVID-19 will be far reaching and very significant across our companies under coverage; while several&nbsp;may benefit, most will be adversely impacted, some materially so,&nbsp;and thus&nbsp;require&nbsp;recapitalisation&nbsp;to survive. The near term outlook is extremely uncertain and while market valuations have been severely hit for many companies,&nbsp;we have a preference for higher quality assets with sustainable cash flows that should trade on a largely business-as-usual track through these challenging times. In contrast, companies most at risk include (1) those that&nbsp;have direct exposure to travel and tourism, (2) those that will be impacted by changing consumer behaviour (given social distancing and&nbsp;lock-down), and (3) those that are cyclical as a result of the impending domestic and global recession. We have subjectively screened all companies in our universe of coverage for&nbsp;COVID-19 risks (both negative and positive). Those most impacted will experience significant declines in profitability, with many likely to generate losses, and needing additional balance sheet support. At the other end of the&nbsp;spectrum there are companies in the&nbsp;telco,&nbsp;healthcare, and utilities sectors that should be largely unaffected. Our preferred larger cap exposures to navigate&nbsp;COVID-19 are OUTPERFORM rated Spark (SPK), Chorus (CNU), Contact (CEN), Genesis (GNE),&nbsp;Trustpower&nbsp;(TPW), and&nbsp;The A2 Milk Company (ATM); and NEUTRAL rated Vital&nbsp;Healthcare&nbsp;(VHP), Mercury (MCY), Meridian (MEL), Vector (VCT), and&nbsp;EBOS&nbsp;Group (EBO).
Figure 1. Companies most exposed to COVID-19
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/124/421/original/image_21242315321585010112113.png?1585010114" class="editor-image img-responsive" data-smartkarma-image-id="124421"></figure>
Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Figure 2. Companies least exposed to COVID-19
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/124/422/original/image_84241576731585010165318.png?1585010165" class="editor-image img-responsive" data-smartkarma-image-id="124422"></figure>
Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Relative safe havens
The companies with the least demand risk to COVID-19 include CNU, Fisher &amp; Paykel Healthcare (FPH), SPK, VHP, VCT, ATM, EBO, and the gentailers — CEN, MEL, MCY, GNE, TPW and Tilt Renewables (TLT). In fact CNU, FPH, VHP, ATM, SPK, and EBO are all potential demand beneficiaries of COVID-19.&nbsp;
Most adversely impacted&nbsp;
Companies with most exposure to&nbsp;COVID-19 are those that have exposure to (1) travel and tourism, where demand will fall materially and in many cases to zero, (2) the economic cycle, given the impending recession, (3)&nbsp;social distancing, as government actions (including lock-down) and consumer behaviour will change the way we live day to day, (4) at risk demographics, given the propensity of&nbsp;COVID-19 to have a greater impact on the elderly and those with pre-existing medical conditions, and (5) supply chain risks for those companies that are considered non-essential. The most exposed companies, based on our subjective assessment, include Air New Zealand (AIR), Tourism Holdings (THL), Kathmandu (KMD), Michael Hill (MHJ), Auckland Airport (AIA),&nbsp;Briscoe&nbsp;Group (BGP),&nbsp;SKYCITY&nbsp;(SKC), The Warehouse Group (WHS) and Sky TV (SKT).&nbsp;
Demand risk vs share price response thus far&nbsp;
The NZX50 has fallen by ~-32% since it peaked on 21 February 2020 and ~-29% since the Wuhan outbreak began surfacing in mainstream media in mid-January 2020. These percentages have been held up by the two largest index weightings, FPH and ATM, being the only two stocks that have generated positive share price performance. The median share price for the market has since fallen ~-40%.&nbsp;
In Figure 3 we show the subjective COVID-19 demand risk scores that we determine later in this report relative to share price performance since 13&nbsp;January 2020. While we recognise the market peaked on 21 February 2020, we are conscious that companies with primary exposure (i.e. travel and tourism in particular)&nbsp;to COVID-19 had&nbsp;already fallen materially by that stage. Key lower risk investment opportunities exist in the&nbsp;bottom centre of the chart circled in red, where companies have a neutral to positive demand impact from COVID-19, yet their share prices have been hit.
Figure 3. Share price performance since 13 January 2020 vs COVID-19 demand risk score
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/124/423/original/image_43810028741585010270664.png?1585010270" class="editor-image img-responsive" data-smartkarma-image-id="124423"></figure>
Source: Ekon, Forsyth Barr analysis
Key stock opportunities to navigate&nbsp;COVID-19
We believe the key stock opportunities for navigating&nbsp;the immediate&nbsp;COVID-19 outlook include those highlighted in Figure 3 as follows:&nbsp;&nbsp;
<ul type="disc">
<li>Telcos: Spark (SPK), Chorus (CNU)</li>
<li>Utilities: Contact (CEN), Genesis (GNE), Trustpower (TPW), Mercury (MCY), Meridian (MEL), Vector (VCT), Tilt Renewables (TLT)</li>
<li>Property:&nbsp;Vital&nbsp;Healthcare&nbsp;(VHP)</li>
<li>Healthcare:&nbsp;EBOS&nbsp;Group (EBO)</li>
</ul>
In addition, we also believe food/agri players including The A2 Milk Company (ATM), Synlait Milk (SML), Fonterra (FSF), and Scales (SCL) offer relative safe havens at undemanding valuations given (1) their health and well-being benefits, and (2) the protected essential services nature of their respective supply chains.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464

Equity Strategy
COVID-19 Winners, Losers, and Big Losers&nbsp;
The impact of&nbsp;COVID-19 will be far reaching and very significant across our companies under coverage; while several&nbsp;may benefit, most will be adversely impacted, some materially so,&nbsp;and thus&nbsp;require&nbsp;recapitalisation&nbsp;to survive. The near term outlook is extremely uncertain and while market valuations have been severely hit for many companies,&nbsp;we have a preference for higher quality assets with sustainable cash flows that should trade on a largely business-as-usual track through these challenging times. In contrast, companies most at risk include (1) those that&nbsp;have direct exposure to travel and tourism, (2) those that will be impacted by changing consumer behaviour (given social distancing and&nbsp;lock-down), and (3) those that are cyclical as a result of the impending domestic and global recession. We have subjectively screened all companies in our universe of coverage for&nbsp;COVID-19 risks (both negative and positive). Those most impacted will experience significant declines in profitability, with many likely to generate losses, and needing additional balance sheet support. At the other end of the&nbsp;spectrum there are companies in the&nbsp;telco,&nbsp;healthcare, and utilities sectors that should be largely unaffected. Our preferred larger cap exposures to navigate&nbsp;COVID-19 are OUTPERFORM rated Spark (SPK), Chorus (CNU), Contact (CEN), Genesis (GNE),&nbsp;Trustpower&nbsp;(TPW), and&nbsp;The A2 Milk Company (ATM); and NEUTRAL rated Vital&nbsp;Healthcare&nbsp;(VHP), Mercury (MCY), Meridian (MEL), Vector (VCT), and&nbsp;EBOS&nbsp;Group (EBO).
Figure 1. Companies most exposed to COVID-19

Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Figure 2. Companies least exposed to COVID-19

Source: Forsyth Barr analysis NOTE: the total demand risk score is derived from applying weightings to each risk component. The negative risks are all weighted three and the positive risks are all weighted two.
Relative safe havens
The companies with the least demand risk to COVID-19 include CNU, Fisher &amp; Paykel Healthcare (FPH), SPK, VHP, VCT, ATM, EBO, and the gentailers — CEN, MEL, MCY, GNE, TPW and Tilt Renewables (TLT). In fact CNU, FPH, VHP, ATM, SPK, and EBO are all potential demand beneficiaries of COVID-19.&nbsp;
Most adversely impacted&nbsp;
Companies with most exposure to&nbsp;COVID-19 are those that have exposure to (1) travel and tourism, where demand will fall materially and in many cases to zero, (2) the economic cycle, given the impending recession, (3)&nbsp;social distancing, as government actions (including lock-down) and consumer behaviour will change the way we live day to day, (4) at risk demographics, given the propensity of&nbsp;COVID-19 to have a greater impact on the elderly and those with pre-existing medical conditions, and (5) supply chain risks for those companies that are considered non-essential. The most exposed companies, based on our subjective assessment, include Air New Zealand (AIR), Tourism Holdings (THL), Kathmandu (KMD), Michael Hill (MHJ), Auckland Airport (AIA),&nbsp;Briscoe&nbsp;Group (BGP),&nbsp;SKYCITY&nbsp;(SKC), The Warehouse Group (WHS) and Sky TV (SKT).&nbsp;
Demand risk vs share price response thus far&nbsp;
The NZX50 has fallen by ~-32% since it peaked on 21 February 2020 and ~-29% since the Wuhan outbreak began surfacing in mainstream media in mid-January 2020. These percentages have been held up by the two largest index weightings, FPH and ATM, being the only two stocks that have generated positive share price performance. The median share price for the market has since fallen ~-40%.&nbsp;
In Figure 3 we show the subjective COVID-19 demand risk scores that we determine later in this report relative to share price performance since 13&nbsp;January 2020. While we recognise the market peaked on 21 February 2020, we are conscious that companies with primary exposure (i.e. travel and tourism in particular)&nbsp;to COVID-19 had&nbsp;already fallen materially by that stage. Key lower risk investment opportunities exist in the&nbsp;bottom centre of the chart circled in red, where companies have a neutral to positive demand impact from COVID-19, yet their share prices have been hit.
Figure 3. Share price performance since 13 January 2020 vs COVID-19 demand risk score

Source: Ekon, Forsyth Barr analysis
Key stock opportunities to navigate&nbsp;COVID-19
We believe the key stock opportunities for navigating&nbsp;the immediate&nbsp;COVID-19 outlook include those highlighted in Figure 3 as follows:&nbsp;&nbsp;

Telcos: Spark (SPK), Chorus (CNU)
Utilities: Contact (CEN), Genesis (GNE), Trustpower (TPW), Mercury (MCY), Meridian (MEL), Vector (VCT), Tilt Renewables (TLT)
Property:&nbsp;Vital&nbsp;Healthcare&nbsp;(VHP)
Healthcare:&nbsp;EBOS&nbsp;Group (EBO)

In addition, we also believe food/agri players including The A2 Milk Company (ATM), Synlait Milk (SML), Fonterra (FSF), and Scales (SCL) offer relative safe havens at undemanding valuations given (1) their health and well-being benefits, and (2) the protected essential services nature of their respective supply chains.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Matthew Leach matthew.leach@forsythbarr.co.nz +64 4 495 1324&nbsp;
Forsyth Barr Research Team fb.research@forsythbarr.co.nz +64 4 499 7464


Equity Strategy: COVID-19 Winners, Losers, and Big Losers 

<h2>Spark NZ</h2>
1H20&nbsp;— Steady and Reliable
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127
OUTPERFORM&nbsp;
Spark (SPK) delivered another very sound performance. Operating trends remain broadly consistent, and there was not any material new information in the result. Positive growth in mobile revenue underpins SPK's strong position in a healthy and rational market. A robust performance from CCL, SPK's IT services/cloud business, is reassuring after slower growth in 2H19.&nbsp; And the headwind from the decline in legacy voice is moderating as its base declines. In a world hungry for yield, we expect investors will continue see appeal in SPK's consistent delivery, solid market positions, A- rated balance sheet, and attractive dividend yield. Maintain OUTPERFORM.&nbsp;&nbsp;
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">SPK</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$4.78</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">409.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">402.9</td>
<td style="text-align: left; width: 48pt;">417.5</td>
<td style="text-align: left; width: 48pt;">430.7&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">9.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.9</td>
<td style="text-align: left; width: 48pt;">8.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$4.80</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">22.3</td>
<td style="text-align: left; width: 48pt;">21.9</td>
<td style="text-align: left; width: 48pt;">22.7</td>
<td style="text-align: left; width: 48pt;">23.5</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">16.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">15.8</td>
<td style="text-align: left; width: 48pt;">15.5</td>
<td style="text-align: left; width: 48pt;">15.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">2.2</td>
<td style="text-align: left; width: 48pt;">-1.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.6</td>
<td style="text-align: left; width: 48pt;">3.2</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">21.5</td>
<td style="text-align: left; width: 48pt;">21.8</td>
<td style="text-align: left; width: 48pt;">21.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1836.2m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">18.4</td>
<td style="text-align: left; width: 48pt;">19.7</td>
<td style="text-align: left; width: 48pt;">23.1</td>
<td style="text-align: left; width: 48pt;">23.7</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$8,777m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">75</td>
<td style="text-align: left; width: 48pt;">82</td>
<td style="text-align: left; width: 48pt;">99</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">3,448k (NZ$13,895k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">6.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.3&nbsp;</td>
</tr>
</tbody>
</table>
Business as usual
SPK&nbsp;delivered a solid&nbsp;+2% lift in&nbsp;EBITDA, which, coupled with lower depreciation&nbsp;and amortisation,&nbsp;leveraged through to a +9% lift in&nbsp;NPAT.&nbsp;The main features&nbsp;of the period were:
<ol start="1" type="1">
<li>Strong growth in mobile gross margin (GM), up +8%/+NZ$29m benefiting from prepaid to&nbsp;postpaid&nbsp;transition, and customers trading up to higher tier plans;&nbsp;offsetting:</li>
<li>Continued declines in legacy voice, GM down&nbsp;-13%/-NZ$19m. The headwind has moderated (1) following&nbsp;Vodafone's&nbsp;migration off&nbsp;SPK's&nbsp;PSTN, and (2) the lower base effect&nbsp;— voice now represents 12% of&nbsp;SPK's&nbsp;total GM vs. 22% only 3 years ago.</li>
<li>A -NZ$10m reduction in "other" GM which includes (we presume a loss) from Spark Sport and other new ventures.&nbsp;</li>
<li>An underlying reduction in labour costs, but&nbsp;a&nbsp;headline uplift of&nbsp;+NZ$17m, including (1) -NZ$21m less labour capitalised (consistent with&nbsp;SPK's&nbsp;previous guidance of a&nbsp;drop in&nbsp;capex), and (2) a c.+NZ$10m increase in Cloud staff costs.&nbsp; &nbsp;</li>
</ol>
Elsewhere the business's performance was broadly stable. Broadband GM expanded +4%/+NZ$7m from copper price increases and fixed wireless additions through FY19, despite connections easing. Cloud et al revenue grew +12%, although the associated costs (largely labour), means the lift in contribution margin is a modest +NZ$3m. Free cash flow (FCF) was muted in the period by capex phasing and timing of tax payments. SPK expects normalisation of FCF and net debt to decline in the 2H.&nbsp;
Steady and reliable is good
SPK&nbsp;maintained guidance of modest&nbsp;EBITDA&nbsp;growth to NZ$1,100–1,120m, and a flat dividend. We have made no material change to earnings forecasts.
In a world hungry for yield SPK offers an attractive income relative to other defensive NZ stocks, global telco peers, and fixed income. Additionally, valuation metrics are robust, we believe SPK can maintain earnings growth led by mobile, cloud, and cost savings, and the company has a strong track record on execution, consistently outperforming market expectation. SPK’s defensive appeal is supported by its strong, A- rated balance sheet.

Spark NZ
1H20&nbsp;— Steady and Reliable
Matt Henry CFA matthew.henry@forsythbarr.co.nz +64 9 368 0115&nbsp;
Ashton Olds ashton.olds@forsythbarr.co.nz +64 9 368 0127
OUTPERFORM&nbsp;
Spark (SPK) delivered another very sound performance. Operating trends remain broadly consistent, and there was not any material new information in the result. Positive growth in mobile revenue underpins SPK's strong position in a healthy and rational market. A robust performance from CCL, SPK's IT services/cloud business, is reassuring after slower growth in 2H19.&nbsp; And the headwind from the decline in legacy voice is moderating as its base declines. In a world hungry for yield, we expect investors will continue see appeal in SPK's consistent delivery, solid market positions, A- rated balance sheet, and attractive dividend yield. Maintain OUTPERFORM.&nbsp;&nbsp;



NZX Code
SPK
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$4.78
NPAT* (NZ$m)
409.0&nbsp;
402.9
417.5
430.7&nbsp;
EV/EBITDA
9.1&nbsp;
9.0&nbsp;
8.9
8.8&nbsp;


Target Price
NZ$4.80
EPS* (NZc)
22.3
21.9
22.7
23.5
EV/EBIT
16.1&nbsp;
15.8
15.5
15.1&nbsp;


Risk rating
Medium
EPS growth* (%)
2.2
-1.5&nbsp;
3.6
3.2
PE
21.5
21.8
21.0&nbsp;
20.4&nbsp;


Issued shares
1836.2m
DPS (NZc)
25.0&nbsp;
25.0&nbsp;
25.0&nbsp;
25.0&nbsp;
Price/NTA
18.4
19.7
23.1
23.7


Market cap
NZ$8,777m
Imputation (%)
75
82
99
100
Cash div yld (%)
5.2&nbsp;
5.2&nbsp;
5.2&nbsp;
5.2&nbsp;


Avg daily turnover
3,448k (NZ$13,895k)
*Based on normalised profits


Gross div yld (%)
6.8&nbsp;
6.9&nbsp;
7.3&nbsp;
7.3&nbsp;



Business as usual
SPK&nbsp;delivered a solid&nbsp;+2% lift in&nbsp;EBITDA, which, coupled with lower depreciation&nbsp;and amortisation,&nbsp;leveraged through to a +9% lift in&nbsp;NPAT.&nbsp;The main features&nbsp;of the period were:

Strong growth in mobile gross margin (GM), up +8%/+NZ$29m benefiting from prepaid to&nbsp;postpaid&nbsp;transition, and customers trading up to higher tier plans;&nbsp;offsetting:
Continued declines in legacy voice, GM down&nbsp;-13%/-NZ$19m. The headwind has moderated (1) following&nbsp;Vodafone's&nbsp;migration off&nbsp;SPK's&nbsp;PSTN, and (2) the lower base effect&nbsp;— voice now represents 12% of&nbsp;SPK's&nbsp;total GM vs. 22% only 3 years ago.
A -NZ$10m reduction in "other" GM which includes (we presume a loss) from Spark Sport and other new ventures.&nbsp;
An underlying reduction in labour costs, but&nbsp;a&nbsp;headline uplift of&nbsp;+NZ$17m, including (1) -NZ$21m less labour capitalised (consistent with&nbsp;SPK's&nbsp;previous guidance of a&nbsp;drop in&nbsp;capex), and (2) a c.+NZ$10m increase in Cloud staff costs.&nbsp; &nbsp;

Elsewhere the business's performance was broadly stable. Broadband GM expanded +4%/+NZ$7m from copper price increases and fixed wireless additions through FY19, despite connections easing. Cloud et al revenue grew +12%, although the associated costs (largely labour), means the lift in contribution margin is a modest +NZ$3m. Free cash flow (FCF) was muted in the period by capex phasing and timing of tax payments. SPK expects normalisation of FCF and net debt to decline in the 2H.&nbsp;
Steady and reliable is good
SPK&nbsp;maintained guidance of modest&nbsp;EBITDA&nbsp;growth to NZ$1,100–1,120m, and a flat dividend. We have made no material change to earnings forecasts.
In a world hungry for yield SPK offers an attractive income relative to other defensive NZ stocks, global telco peers, and fixed income. Additionally, valuation metrics are robust, we believe SPK can maintain earnings growth led by mobile, cloud, and cost savings, and the company has a strong track record on execution, consistently outperforming market expectation. SPK’s defensive appeal is supported by its strong, A- rated balance sheet.

New Zealand

Spark New Zealand Limited (formerly Telecom Corporation of New Zealand Limited) is a digital services provider for communications, entertainment and IT services over its networks and the Cloud to New Zealanders and businesses. The Company's strategy is focused on customer experiences, mobility and data.

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