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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Sanford (SAN) FY20 Result Initial Impressions — COVID-19 impacted</h2>
Sanford (SAN) reported a (pre-announced) weak FY20 result, with earnings materially impacted by COVID-19 related market disruption and exacerbated by a soft Toothfish season. FY20 adjusted EBIT of NZ$38.3m, is -35% below the prior year on a like for like basis (FY19 NZ$58.6m, adjusted for Pelagic sale), and below our prior expectations (NZ$44.4m).
Outlook commentary is limited to “increased profitability in 2021” with market and channel development the key focus. Inventory build up of product is significant (up +99%) and will likely suppress prices and weigh on any margin recovery as it clears, although this is largely reflected in our current earnings expectations (FY21E EBIT NZ$48.9m).
SAN will not pay a dividend. We expect dividends to remain suppressed near-term, given the soft earnings outlook and elevated capex requirements.
Key points of interest
<ul>
<li>Divisional detail</li>
</ul>
o&nbsp;&nbsp;Wild Catch (EBIT contribution NZ$30m, down -45% on the prior comparable period [pcp]) — Materially impacted by lower prices (down -7%), and a weak Toothfish catch (-NZ$5m impact on EBIT).
o&nbsp;&nbsp;Mussels (NZ$23m, up +30%) — Price (up +6%) and margin improvement (+300bps lift in EBIT margin), supported by mix change and increased harvest volume. However, prices have softened in Q4, with pricing pressure as inventory clears.
o&nbsp;&nbsp;Salmon (NZ$20m, down -9%) — Collapse of Foodservice demand has slowed the launch of branded product, while softer price assumptions impact the fair value changes recognised at balance date.
<ul>
<li>Balance sheet — Net debt up +41% on the prior year to NZ$184m (2.8x net debt / EBITDA), driven by soft earnings and a large build up in inventory.</li>
</ul>
o&nbsp;&nbsp;Inventory is up +99% on the prior year to NZ$75m. At first glance increases appear to be across the board rather than driven by a single species.
<ul>
<li>Capex — FY21 capex guidance of NZ$45m to NZ$55m. This is below our prior expectations as the company manages cash flow. This is likely to push out growth opportunities with Scampi vessel investment called out as a project facing delay.</li>
</ul>
Investment view
Whilst SAN’s FY20 earnings are disappointing, it is largely a factor of COVID-19 disruption. Key earnings drivers remain intact, with no underlying changes to asset productivity or long-term growth opportunities. SAN’s earnings are likely to remain under pressure while COVID-19 disrupts global restaurant trade, with a normalisation of food supply chains a key catalyst for a change in tides. Whilst we do not expect this to occur any time soon, we view the current share price as an attractive entry point for exposure to a series of unique fisheries and marine farm assets. OUTPERFORM.
FY20 result summary (NZ$m)
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1683097115683466814&amp;th=175b8fe8c6cc2e3e&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ81VuVoTIV0HlyZjPsUi1IGnlRYn6YmQWvs0KRtyZQ1As-f9iQYv0MKfi9Ibg_AtS00A04589OaMJFeimZr9PyzhIee2yImgjsynHTHT9An5hFE_lEAN-ktnWM&amp;disp=emb" width="330" height="243" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: Company reports, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.3&amp;permmsgid=msg-f:1683097115683466814&amp;th=175b8fe8c6cc2e3e&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-6RffSlLwQ4sDud_4jpHECUSrnJhSuNaYZiADQ4NHbDwQdZkk-udLy-oScuYj37OnbQO9jW_rnWQmeInLjlB4GlvltUeyHaqv2_TJmLRpRu67om0zLwMEzoMg&amp;disp=emb" class="editor-image img-responsive"></figure>
 P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Sanford (SAN) FY20 Result Initial Impressions — COVID-19 impacted
Sanford (SAN) reported a (pre-announced) weak FY20 result, with earnings materially impacted by COVID-19 related market disruption and exacerbated by a soft Toothfish season. FY20 adjusted EBIT of NZ$38.3m, is -35% below the prior year on a like for like basis (FY19 NZ$58.6m, adjusted for Pelagic sale), and below our prior expectations (NZ$44.4m).
Outlook commentary is limited to “increased profitability in 2021” with market and channel development the key focus. Inventory build up of product is significant (up +99%) and will likely suppress prices and weigh on any margin recovery as it clears, although this is largely reflected in our current earnings expectations (FY21E EBIT NZ$48.9m).
SAN will not pay a dividend. We expect dividends to remain suppressed near-term, given the soft earnings outlook and elevated capex requirements.
Key points of interest

Divisional detail

o&nbsp;&nbsp;Wild Catch (EBIT contribution NZ$30m, down -45% on the prior comparable period [pcp]) — Materially impacted by lower prices (down -7%), and a weak Toothfish catch (-NZ$5m impact on EBIT).
o&nbsp;&nbsp;Mussels (NZ$23m, up +30%) — Price (up +6%) and margin improvement (+300bps lift in EBIT margin), supported by mix change and increased harvest volume. However, prices have softened in Q4, with pricing pressure as inventory clears.
o&nbsp;&nbsp;Salmon (NZ$20m, down -9%) — Collapse of Foodservice demand has slowed the launch of branded product, while softer price assumptions impact the fair value changes recognised at balance date.

Balance sheet — Net debt up +41% on the prior year to NZ$184m (2.8x net debt / EBITDA), driven by soft earnings and a large build up in inventory.

o&nbsp;&nbsp;Inventory is up +99% on the prior year to NZ$75m. At first glance increases appear to be across the board rather than driven by a single species.

Capex — FY21 capex guidance of NZ$45m to NZ$55m. This is below our prior expectations as the company manages cash flow. This is likely to push out growth opportunities with Scampi vessel investment called out as a project facing delay.

Investment view
Whilst SAN’s FY20 earnings are disappointing, it is largely a factor of COVID-19 disruption. Key earnings drivers remain intact, with no underlying changes to asset productivity or long-term growth opportunities. SAN’s earnings are likely to remain under pressure while COVID-19 disrupts global restaurant trade, with a normalisation of food supply chains a key catalyst for a change in tides. Whilst we do not expect this to occur any time soon, we view the current share price as an attractive entry point for exposure to a series of unique fisheries and marine farm assets. OUTPERFORM.
FY20 result summary (NZ$m)

Source: Company reports, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities

 P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Sanford (SAN): FY20 Result Initial Impressions — COVID-19 Impacted

Sanford Limited

Sanford (SAN): FY20 Result Initial Impressions — COVID-19 Impacted