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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

New Zealand King Salmon / Equity Bottom-Up

<h2>New Zealand King Salmon<br>Grading the Problematic Year Class</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>New Zealand King Salmon (NZK) provided formal earnings guidance on 30 July following its June update, which highlighted the challenging growing conditions as a result of its shift in operating models. We lower near-term earnings to reflect the updated guidance but with limited changes in the medium to long-term.&nbsp;NZK has an enviable brand position and demand recovery signals are beginning to turn positive. We continue to see the long-term opportunity as attractive, with volume upside&nbsp;optionality&nbsp;should it get a positive outcome from its farm consent hearing in October 2021. OUTPERFORM.</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings:</strong>&nbsp;We lower our FY22 earnings -NZ$9m, with the impact of the challenging year class greater than we originally thought. Our revised FY22 operating EBITDA&nbsp; forecast of NZ$9m is&nbsp;consistent with updated guidance provided of NZ$8m&nbsp;to NZ$10m.&nbsp;</li>
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<h3>A problematic year class</h3>
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<p>NZK has provided FY22 operating EBITDA&nbsp;guidance of NZ$8m to NZ$10m, down c. -63% on its last reported full period operating EBITDA (FY20 NZ$25m). NZK first signalled challenging grow out conditions in June 2021, experienced as a result of its single-year class operating model, which saw&nbsp;fish run through summer water in the&nbsp;Pelorus&nbsp;Sounds at a different life cycle stage than is ideal. The impact of this is 1) higher feed conversion ratios and mortality rates, which result in margin compression, 2) smaller fish are likely to weigh on market prices, and 3) the delayed harvest will shift earnings timing from 1H22 into 2H22.</p>
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<h3>Demand&nbsp; backdrop improves, NZK implements price increases</h3>
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<p>Industry data suggests foodservice activity levels are approaching pre COVID-19 levels. Encouragingly, those populations with higher vaccination rates are illustrating smaller impacts on activity as a result of the Delta variant, which is important for sector confidence and seafood demand, given the shorter shelf life. An improving backdrop is also becoming evident in export data, with underlying salmon prices improving for a fourth consecutive month in June 2021 while lower frozen export volumes suggests sector inventory clearance is approaching completion. NZK has now put through price increases across its portfolio.</p>
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<h3>Blue Endeavour hearing scheduled for October 2021</h3>
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<p>NZK has confirmed a hearing date for its proposed open ocean farm, Blue Endeavour, in October 2021. A successful outcome at this hearing is the last regulatory hurdle before it can progress. The first stage of the farm is expected to produce c. 4,000MT over an 18 month cycle, with the earliest possible harvest being c. June 2024. We expect NZK to raise capital in 2022 in order to fund Blue Endeavour, with infrastructure capex expected to be c. NZ$30m in addition to c. NZ$25m relating to associated services.</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>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
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New Zealand King Salmon Grading the Problematic Year Class

OUTPERFORM
New Zealand King Salmon (NZK) provided formal earnings guidance on 30 July following its June update, which highlighted the challenging growing conditions as a result of its shift in operating models. We lower near-term earnings to reflect the updated guidance but with limited changes in the medium to long-term.&nbsp;NZK has an enviable brand position and demand recovery signals are beginning to turn positive. We continue to see the long-term opportunity as attractive, with volume upside&nbsp;optionality&nbsp;should it get a positive outcome from its farm consent hearing in October 2021. OUTPERFORM.


What's changed?&nbsp;



Earnings:&nbsp;We lower our FY22 earnings -NZ$9m, with the impact of the challenging year class greater than we originally thought. Our revised FY22 operating EBITDA&nbsp; forecast of NZ$9m is&nbsp;consistent with updated guidance provided of NZ$8m&nbsp;to NZ$10m.&nbsp;



A problematic year class


NZK has provided FY22 operating EBITDA&nbsp;guidance of NZ$8m to NZ$10m, down c. -63% on its last reported full period operating EBITDA (FY20 NZ$25m). NZK first signalled challenging grow out conditions in June 2021, experienced as a result of its single-year class operating model, which saw&nbsp;fish run through summer water in the&nbsp;Pelorus&nbsp;Sounds at a different life cycle stage than is ideal. The impact of this is 1) higher feed conversion ratios and mortality rates, which result in margin compression, 2) smaller fish are likely to weigh on market prices, and 3) the delayed harvest will shift earnings timing from 1H22 into 2H22.


Demand&nbsp; backdrop improves, NZK implements price increases


Industry data suggests foodservice activity levels are approaching pre COVID-19 levels. Encouragingly, those populations with higher vaccination rates are illustrating smaller impacts on activity as a result of the Delta variant, which is important for sector confidence and seafood demand, given the shorter shelf life. An improving backdrop is also becoming evident in export data, with underlying salmon prices improving for a fourth consecutive month in June 2021 while lower frozen export volumes suggests sector inventory clearance is approaching completion. NZK has now put through price increases across its portfolio.


Blue Endeavour hearing scheduled for October 2021


NZK has confirmed a hearing date for its proposed open ocean farm, Blue Endeavour, in October 2021. A successful outcome at this hearing is the last regulatory hurdle before it can progress. The first stage of the farm is expected to produce c. 4,000MT over an 18 month cycle, with the earliest possible harvest being c. June 2024. We expect NZK to raise capital in 2022 in order to fund Blue Endeavour, with infrastructure capex expected to be c. NZ$30m in addition to c. NZ$25m relating to associated services.



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



New Zealand King Salmon: Grading the Problematic Year Class