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>Sanford<br>Swimming Against the Current</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Sanford (SAN) pre-released headline FY20 results, reporting weak earnings following a challenging period, compounded by&nbsp; lower than expected wild catch volumes. We reduce our medium-term earnings assumptions, pushing out a recovery in demand, and lower our target price -6% to NZ$7.00.&nbsp;SAN's&nbsp;earnings are likely to remain under pressure while COVID-19 continues to impact the global restaurant trade, with a normalisation of food supply chains the 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, and a long-term growth strategy to extract further value. SAN will report its&nbsp;FY20 result on Thursday, 12 November.</p>
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<h3>SAN pre-release FY20 headline result, full release on Thursday, 12 November</h3>
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<p>SAN has reported FY20 underlying EBIT of NZ$38.3m, down -41% on the prior year and -14% below our expectations. FY20 has been characterised&nbsp;by&nbsp;COVID-19 and its impact on the restaurant trade. Two key additional drivers of weakness into&nbsp;balance date include:</p>
<ul>
<li>Lower fair value assumptions for salmon stock, driven by weaker than expected salmon prices as a result of COVID-19. Whilst recent export data suggests salmon volumes are recovering, prices remain under pressure and are likely to remain so, particularly as elevated inventory stock washes through the market.</li>
<li>A weak Patagonian&nbsp;toothfish&nbsp;season, weighing&nbsp;on the&nbsp;wildcatch&nbsp;division.&nbsp;Its higher sunk cost base leads to operating de-leverage in the event of lower catch volumes.</li>
</ul>
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<h3>Key points of interest at the&nbsp;result</h3>
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<ul>
<li><strong>Demand recovery&nbsp;</strong>— The key earnings overhang is the disruption to restaurant trade. The&nbsp;timeframe&nbsp;for a demand recovery is both speculative and unlikely to be near-term. However, export data is beginning to show signs of life and we look for any indication&nbsp;on recent trading and&nbsp;success of channel redeployment strategies.</li>
<li><strong>Inventory levels</strong>&nbsp;—&nbsp;We expect&nbsp;SAN to report elevated inventory levels as catch and harvest volumes were frozen amid restricted trade. We look for indications of industry inventory levels and expected market price impacts.</li>
<li><strong>Balance sheet and capital allocation&nbsp;</strong>— Weaker earnings in combination with elevated&nbsp;capex&nbsp;requirements create balance sheet pressure. Although the balance sheet remains within covenants, it creates questions around capital allocation and potential dividend cuts.</li>
<li><strong>Salmon volume opportunities</strong> —&nbsp;SAN is&nbsp;progressing&nbsp;through the consultation stage on its proposed open ocean salmon farm. Given the size of the opportunity (c. 5,000 MT production per stage, five stages), progress and timing expectations are of interest.</li>
<li><strong>Management change</strong> — SAN announced the departure of its CEO in September. We look for any commentary on the replacement progress.</li>
</ul>
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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>
</div>
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Sanford Swimming Against the Current

OUTPERFORM
Sanford (SAN) pre-released headline FY20 results, reporting weak earnings following a challenging period, compounded by&nbsp; lower than expected wild catch volumes. We reduce our medium-term earnings assumptions, pushing out a recovery in demand, and lower our target price -6% to NZ$7.00.&nbsp;SAN's&nbsp;earnings are likely to remain under pressure while COVID-19 continues to impact the global restaurant trade, with a normalisation of food supply chains the 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, and a long-term growth strategy to extract further value. SAN will report its&nbsp;FY20 result on Thursday, 12 November.


SAN pre-release FY20 headline result, full release on Thursday, 12 November


SAN has reported FY20 underlying EBIT of NZ$38.3m, down -41% on the prior year and -14% below our expectations. FY20 has been characterised&nbsp;by&nbsp;COVID-19 and its impact on the restaurant trade. Two key additional drivers of weakness into&nbsp;balance date include:

Lower fair value assumptions for salmon stock, driven by weaker than expected salmon prices as a result of COVID-19. Whilst recent export data suggests salmon volumes are recovering, prices remain under pressure and are likely to remain so, particularly as elevated inventory stock washes through the market.
A weak Patagonian&nbsp;toothfish&nbsp;season, weighing&nbsp;on the&nbsp;wildcatch&nbsp;division.&nbsp;Its higher sunk cost base leads to operating de-leverage in the event of lower catch volumes.



Key points of interest at the&nbsp;result



Demand recovery&nbsp;— The key earnings overhang is the disruption to restaurant trade. The&nbsp;timeframe&nbsp;for a demand recovery is both speculative and unlikely to be near-term. However, export data is beginning to show signs of life and we look for any indication&nbsp;on recent trading and&nbsp;success of channel redeployment strategies.
Inventory levels&nbsp;—&nbsp;We expect&nbsp;SAN to report elevated inventory levels as catch and harvest volumes were frozen amid restricted trade. We look for indications of industry inventory levels and expected market price impacts.
Balance sheet and capital allocation&nbsp;— Weaker earnings in combination with elevated&nbsp;capex&nbsp;requirements create balance sheet pressure. Although the balance sheet remains within covenants, it creates questions around capital allocation and potential dividend cuts.
Salmon volume opportunities —&nbsp;SAN is&nbsp;progressing&nbsp;through the consultation stage on its proposed open ocean salmon farm. Given the size of the opportunity (c. 5,000 MT production per stage, five stages), progress and timing expectations are of interest.
Management change — SAN announced the departure of its CEO in September. We look for any commentary on the replacement progress.





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




Sanford Limited

Sanford: Swimming Against the Current