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>Kathmandu Holdings</h2>
<p><strong>Torquay&nbsp;Tour</strong></p>
<p>Kathmandu Holdings (KMD) provided investors with an encouraging 1H20E trading update and greater detail on its new group strategy following the acquisition of Rip Curl. Whilst there is scope for some limited cost synergies, we believe the key benefit Rip Curl offers KMD is the opportunity to accelerate its international expansion plans through leveraging expertise and existing relationships in the wholesale channel, namely in North America and Europe. We lift our target price +NZ$0.30 to NZ$3.30 reflecting 1) peer multiple expansion and 2) a lower seasonal risk discount for KMD following the acquisition of Rip Curl. Given the early stages of the revised group strategy and acquisition integration risk, we currently see the risk/reward as balanced and retain a NEUTRAL rating.</p>
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col span="2"> <col> <col> <col> <col> <col span="2"></colgroup>
<tbody>
<tr>
<td style="width: 50.4px;">NZX Code</td>
<td style="width: 64.8px;">KMD</td>
<td style="width: 107.2px;">Financials:Jan/</td>
<td style="width: 30.4px;">19A</td>
<td style="width: 30.4px;">20E</td>
<td style="width: 30.4px;">21E</td>
<td style="width: 30.4px;">22E</td>
<td style="width: 68px;">Valuation (x)</td>
<td style="width: 27.2px;">19A</td>
<td style="width: 27.2px;">20E</td>
<td style="width: 27.2px;">21E</td>
<td style="width: 27.2px;">22E</td>
</tr>
<tr>
<td style="width: 50.4px;">Share price</td>
<td style="width: 64.8px;">NZ$3.44</td>
<td style="width: 107.2px;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 30.4px;">56.8</td>
<td style="text-align: left; width: 30.4px;">77.0&nbsp;</td>
<td style="text-align: left; width: 30.4px;">89.9</td>
<td style="text-align: left; width: 30.4px;">95.2</td>
<td style="width: 68px;">EV/EBITDA</td>
<td style="text-align: left; width: 27.2px;">10.1</td>
<td style="text-align: left; width: 27.2px;">7.8</td>
<td style="text-align: left; width: 27.2px;">6.9</td>
<td style="text-align: left; width: 27.2px;">6.6</td>
</tr>
<tr>
<td style="width: 50.4px;">Target price</td>
<td style="width: 64.8px;">NZ$3.30</td>
<td style="width: 107.2px;">EPS* (NZc)</td>
<td style="text-align: left; width: 30.4px;">25.1</td>
<td style="text-align: left; width: 30.4px;">27.1&nbsp;</td>
<td style="text-align: left; width: 30.4px;">31.6</td>
<td style="text-align: left; width: 30.4px;">33.5</td>
<td style="width: 68px;">EV/EBIT</td>
<td style="text-align: left; width: 27.2px;">11.9</td>
<td style="text-align: left; width: 27.2px;">9.5</td>
<td style="text-align: left; width: 27.2px;">8.4</td>
<td style="text-align: left; width: 27.2px;">8.1</td>
</tr>
<tr>
<td style="width: 50.4px;">Risk rating</td>
<td style="width: 64.8px;">High</td>
<td style="width: 107.2px;">EPS growth* (%)</td>
<td style="text-align: left; width: 30.4px;">4.8</td>
<td style="text-align: left; width: 30.4px;">7.7&nbsp;</td>
<td style="text-align: left; width: 30.4px;">16.7</td>
<td style="text-align: left; width: 30.4px;">5.9</td>
<td style="width: 68px;">PE</td>
<td style="text-align: left; width: 27.2px;">13.7</td>
<td style="text-align: left; width: 27.2px;">12.7</td>
<td style="text-align: left; width: 27.2px;">10.9</td>
<td style="text-align: left; width: 27.2px;">10.3</td>
</tr>
<tr>
<td style="width: 50.4px;">Issued shares</td>
<td style="width: 64.8px;">284.4m</td>
<td style="width: 107.2px;">DPS (NZc)</td>
<td style="text-align: left; width: 30.4px;">16.0&nbsp;</td>
<td style="text-align: left; width: 30.4px;">17.0&nbsp;</td>
<td style="text-align: left; width: 30.4px;">19.0&nbsp;</td>
<td style="text-align: left; width: 30.4px;">21.0&nbsp;</td>
<td style="width: 68px;">Price/NTA</td>
<td style="text-align: left; width: 27.2px;">13.9</td>
<td style="text-align: left; width: 27.2px;">18.3</td>
<td style="text-align: left; width: 27.2px;">10.9</td>
<td style="text-align: left; width: 27.2px;">n/a</td>
</tr>
<tr>
<td style="width: 50.4px;">Market cap</td>
<td style="width: 64.8px;">NZ$978m</td>
<td style="width: 107.2px;">Imputation (%)</td>
<td style="text-align: left; width: 30.4px;">100</td>
<td style="text-align: left; width: 30.4px;">100&nbsp;</td>
<td style="text-align: left; width: 30.4px;">100</td>
<td style="text-align: left; width: 30.4px;">100</td>
<td style="width: 68px;">Cash div yld (%)</td>
<td style="text-align: left; width: 27.2px;">4.7</td>
<td style="text-align: left; width: 27.2px;">4.9</td>
<td style="text-align: left; width: 27.2px;">5.5</td>
<td style="text-align: left; width: 27.2px;">6.1</td>
</tr>
<tr>
<td style="width: 50.4px;">Avg daily turnover</td>
<td style="width: 64.8px;">246.7k (NZ$682k)</td>
<td style="width: 107.2px;">*Historic.forecast numbers based on normalised profits</td>
<td style="width: 30.4px;"></td>
<td style="width: 30.4px;"></td>
<td style="width: 30.4px;"></td>
<td style="width: 30.4px;"></td>
<td style="width: 68px;">Gross div yld (%)</td>
<td style="text-align: left; width: 27.2px;">6.5</td>
<td style="text-align: left; width: 27.2px;">6.9</td>
<td style="text-align: left; width: 27.2px;">7.7</td>
<td style="text-align: left; width: 27.2px;">8.5</td>
</tr>
</tbody>
</table>
<div>
<h2>Trading update encouraging</h2>
</div>
<p>KMD provided 1H20E EBIT (pre IFRS16) guidance, largely in line with our expectations, for growth of +40% on the prior year period. Growth reflects the acquisition of Rip Curl combined with underlying sales growth from both its Kathmandu and Oboz brands. We suspect investor sentiment shifted negative heading into the trading announcement, given the Australian bush fires and competitive retail backdrop, with the market likely positively surprised by 1H20 Kathmandu brand same store sales growth of +1.5%. We remain comfortable with our FY20E earnings forecasts, although see upside risk to medium-term forecasts should KMD execute on its international growth path faster/stronger than anticipated. KMD will release its 1H20 result on 30 March 2020.</p>
<p><strong>Delving deeper into Rip Curl </strong></p>
<p>The investor day showcased Rip Curl and provided greater detail on the group strategy, which we view positively. We expect Rip Curl underlying growth will be largely in line with the broader surf category; however, the brand's global reach and channel expertise offer opportunities to deliver group earnings growth through the following:</p>
<ul type="disc">
<li><strong>Revenue synergies</strong> —&nbsp;Leveraging Rip&nbsp;Curl's&nbsp;expertise in the wholesale channel to accelerate international growth of the Kathmandu brand.&nbsp;</li>
<li><strong>Supply chain efficiencies</strong> —&nbsp;Scale benefits and systems integrations are likely to unlock modest efficiencies and be beneficial for gross margin.</li>
<li><strong>Lower seasonal risk</strong> —&nbsp;Rip&nbsp;Curl's&nbsp;geographic diversity and strength in summer apparel lowers the group seasonal risk profile, and offers opportunity to leverage seasonal expertise to grow the counter-seasonal range for the respective brands.</li>
</ul>
<p><strong>Guy Hooper</strong><br><em>guy.hooper@forsythbarr.co.nz</em><br>+64 4 495 5255</p>

Kathmandu Holdings
Torquay&nbsp;Tour
Kathmandu Holdings (KMD) provided investors with an encouraging 1H20E trading update and greater detail on its new group strategy following the acquisition of Rip Curl. Whilst there is scope for some limited cost synergies, we believe the key benefit Rip Curl offers KMD is the opportunity to accelerate its international expansion plans through leveraging expertise and existing relationships in the wholesale channel, namely in North America and Europe. We lift our target price +NZ$0.30 to NZ$3.30 reflecting 1) peer multiple expansion and 2) a lower seasonal risk discount for KMD following the acquisition of Rip Curl. Given the early stages of the revised group strategy and acquisition integration risk, we currently see the risk/reward as balanced and retain a NEUTRAL rating.
         


NZX Code
KMD
Financials:Jan/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$3.44
NPAT* (NZ$m)
56.8
77.0&nbsp;
89.9
95.2
EV/EBITDA
10.1
7.8
6.9
6.6


Target price
NZ$3.30
EPS* (NZc)
25.1
27.1&nbsp;
31.6
33.5
EV/EBIT
11.9
9.5
8.4
8.1


Risk rating
High
EPS growth* (%)
4.8
7.7&nbsp;
16.7
5.9
PE
13.7
12.7
10.9
10.3


Issued shares
284.4m
DPS (NZc)
16.0&nbsp;
17.0&nbsp;
19.0&nbsp;
21.0&nbsp;
Price/NTA
13.9
18.3
10.9
n/a


Market cap
NZ$978m
Imputation (%)
100
100&nbsp;
100
100
Cash div yld (%)
4.7
4.9
5.5
6.1


Avg daily turnover
246.7k (NZ$682k)
*Historic.forecast numbers based on normalised profits




Gross div yld (%)
6.5
6.9
7.7
8.5




Trading update encouraging

KMD provided 1H20E EBIT (pre IFRS16) guidance, largely in line with our expectations, for growth of +40% on the prior year period. Growth reflects the acquisition of Rip Curl combined with underlying sales growth from both its Kathmandu and Oboz brands. We suspect investor sentiment shifted negative heading into the trading announcement, given the Australian bush fires and competitive retail backdrop, with the market likely positively surprised by 1H20 Kathmandu brand same store sales growth of +1.5%. We remain comfortable with our FY20E earnings forecasts, although see upside risk to medium-term forecasts should KMD execute on its international growth path faster/stronger than anticipated. KMD will release its 1H20 result on 30 March 2020.
Delving deeper into Rip Curl 
The investor day showcased Rip Curl and provided greater detail on the group strategy, which we view positively. We expect Rip Curl underlying growth will be largely in line with the broader surf category; however, the brand's global reach and channel expertise offer opportunities to deliver group earnings growth through the following:

Revenue synergies —&nbsp;Leveraging Rip&nbsp;Curl's&nbsp;expertise in the wholesale channel to accelerate international growth of the Kathmandu brand.&nbsp;
Supply chain efficiencies —&nbsp;Scale benefits and systems integrations are likely to unlock modest efficiencies and be beneficial for gross margin.
Lower seasonal risk —&nbsp;Rip&nbsp;Curl's&nbsp;geographic diversity and strength in summer apparel lowers the group seasonal risk profile, and offers opportunity to leverage seasonal expertise to grow the counter-seasonal range for the respective brands.

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

Kathmandu Holdings

Kathmandu Holdings:Torquay Tour