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

Michael Hill International / Equity Bottom-Up

<h2>Michael Hill Intl (MHJ)</h2>
3Q20 Sales — Initial Impressions: Tracking well into COVID-19
Michael Hill (MHJ) reported a strong start to 3Q20, although slowed down materially as COVID-19 spread and messaging around social distancing grew. Stores across all markets temporarily closed from the last week of March.
We recently updated our forecasts to reflect an estimated five weeks of store door closures across all markets in combination with a temporary reduced fixed cost base (wage and rental relief). At this stage we remain comfortable with our earlier estimates although note the significant level of uncertainty, a slower economic outlook, and risk of second infection waves. The stock price has fallen -50% year to date, which we view as fair given the earnings impact and elevated risk profile. NEUTRAL
Refer to report&nbsp;<a href="https://www.forsythbarr.co.nz/secure/research/michael-hill-intl-mhj-canada-closing-doors" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://www.forsythbarr.co.nz/secure/research/michael-hill-intl-mhj-canada-closing-doors&amp;source=gmail&amp;ust=1587168510791000&amp;usg=AFQjCNGG60Q-w6Xs3Sqv6bgMAxZpT7G3UQ" rel="noopener">Canada Closing Doors</a>&nbsp;– published 23 March for additional detail on previous earnings changes made.
Balance sheet passes health check
MHJ expect to have sufficient liquidity in its balance sheet to trade through COVID-19. Heading into the pandemic MHJ's balance sheet was conservatively geared (net cash at 1H20), with a current net debt position of c. A$35m. MHJ has cut all non-essential capex near-term, deferring its interim dividend. We assume no dividend will be paid in FY20E. We estimate MHJ would have to see a c. -70% decline to our prior FY21E EBITDA forecast (a further -33% from our revised COVID-19 forecasts) before raising a 2.5x net debt/EBITDA 'red flag.
Key points&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<ul>
<li>Same store sales (SSS) snapshots highlights degree of slow down</li>
</ul>
o&nbsp;&nbsp;As at end February, group same store sales (SSS) were up +5.7% year to date. At the end of the quarter (March) SSS were up +1.5%.
o&nbsp;&nbsp;For the first nine weeks of 3Q20, group SSS were up +3.1%. For the quarter as a whole down -11.2%. Using rough analysis (assuming linear sales through the quarter i.e. ignoring Valentine’s Day impact), we estimate that in the c. three weeks leading up to closures sales fell ~-25% on the prior comparable period.
<ul>
<li>E-commerce: 3Q20 online sales increased +49% on the prior year period (3.6% of total quarterly sales).</li>
</ul>
o&nbsp;&nbsp;Albeit small, online will become increasingly important with social distancing messages likely to exist for a prolonged period. MHJ&nbsp;is&nbsp;accelerating&nbsp;its&nbsp;online initiatives.
MHJ quarterly same store sales
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1664170819130021634&amp;th=1718528af7d0d702&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ9r31nxDeX2GNYvGukzAKh_Vx8_fMIx2jP29SjB46fKAIpP6O0BKO2uUzOJt3RwFWF8pKmuN5Ijh3FJsqdeoFhZkijnQfIF8HNnbnpmfOUjxM1CVhCqR5KumVc&amp;disp=emb" width="397" height="259" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: Company reports, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities Forsyth Barr Limited
P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Michael Hill Intl (MHJ)
3Q20 Sales — Initial Impressions: Tracking well into COVID-19
Michael Hill (MHJ) reported a strong start to 3Q20, although slowed down materially as COVID-19 spread and messaging around social distancing grew. Stores across all markets temporarily closed from the last week of March.
We recently updated our forecasts to reflect an estimated five weeks of store door closures across all markets in combination with a temporary reduced fixed cost base (wage and rental relief). At this stage we remain comfortable with our earlier estimates although note the significant level of uncertainty, a slower economic outlook, and risk of second infection waves. The stock price has fallen -50% year to date, which we view as fair given the earnings impact and elevated risk profile. NEUTRAL
Refer to report&nbsp;Canada Closing Doors&nbsp;– published 23 March for additional detail on previous earnings changes made.
Balance sheet passes health check
MHJ expect to have sufficient liquidity in its balance sheet to trade through COVID-19. Heading into the pandemic MHJ's balance sheet was conservatively geared (net cash at 1H20), with a current net debt position of c. A$35m. MHJ has cut all non-essential capex near-term, deferring its interim dividend. We assume no dividend will be paid in FY20E. We estimate MHJ would have to see a c. -70% decline to our prior FY21E EBITDA forecast (a further -33% from our revised COVID-19 forecasts) before raising a 2.5x net debt/EBITDA 'red flag.
Key points&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;

Same store sales (SSS) snapshots highlights degree of slow down

o&nbsp;&nbsp;As at end February, group same store sales (SSS) were up +5.7% year to date. At the end of the quarter (March) SSS were up +1.5%.
o&nbsp;&nbsp;For the first nine weeks of 3Q20, group SSS were up +3.1%. For the quarter as a whole down -11.2%. Using rough analysis (assuming linear sales through the quarter i.e. ignoring Valentine’s Day impact), we estimate that in the c. three weeks leading up to closures sales fell ~-25% on the prior comparable period.

E-commerce: 3Q20 online sales increased +49% on the prior year period (3.6% of total quarterly sales).

o&nbsp;&nbsp;Albeit small, online will become increasingly important with social distancing messages likely to exist for a prolonged period. MHJ&nbsp;is&nbsp;accelerating&nbsp;its&nbsp;online initiatives.
MHJ quarterly same store sales

Source: Company reports, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities Forsyth Barr Limited
P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Michael Hill Intl (MHJ): 3Q20 Sales — Initial Impressions: Tracking Well into COVID-19