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

Scales A Shortage of Pickers Prunes Margin

NEUTRAL
FY21 is shaping up to be another mixed bag for Scales (SCL),&nbsp;with suppressed Horticulture margins partially offset by favourable dynamics in the pet food ingredients business. We re-balance our short-to-medium term earnings assumptions for SCL&nbsp;on the back of channel checks and our view that wage pressure is likely to be enduring. Trading on a 24 month forward PE ratio of 19x, in line with historic levels, we view current risk/reward as broadly fair relative to peers. NEUTRAL.


What's changed?&nbsp;



Earnings: We lower our FY21 pre-IFRS 16 EBITDA forecast to the bottom end of the guidance range (NZ$46.5m to NZ$53.5m), cutting it -4.1% to NZ$46.5m. We also lower our FY22 pre-IFRS 16 EBITDA forecast -1.9% to NZ$54.2m, as we revise our labour cost expectations higher.&nbsp;
Target price:&nbsp;Our target price falls -25cps&nbsp;(-5.0%) to NZ$4.75, reflecting earnings changes and higher&nbsp;capex&nbsp;expectations as automation initiatives are prioritised.



Harvest completed in line with expectations but supply chain is challenging


SCL completed its FY21 pick, largely in line with pre-harvest expectations (slightly lower own-grown contribution) despite industry labour shortages, however, a combination of wage inflation and a higher proportion of less productive domestic labour force has weighed on margins. While channel checks suggest prices to date have been strong, we see late season risk due to supply chain congestion. Total export volumes to May 2021 are down -20% on the prior year period, versus the industry expectation of&nbsp;a -15% drop.&nbsp;We believe the delta represents apples in cold store due to be shipped, which have been delayed by sea freight congestion. Whilst this adds storage costs, more importantly it creates price risks later in the season as the sales window in markets shortens.&nbsp;


Tight labour market a challenge


We lower&nbsp;our medium-term Horticulture margin expectations&nbsp;on the back of wage inflation, which has primarily been driven by a shortage of suitable labour. We believe this dynamic is unlikely to change ahead of the next season&nbsp;given government rhetoric around migrant labour and limited RSE (recognised seasonal employee) allocations. SCL has accelerated initiatives around automation of post-harvest operations in response, although these will likely take some time to implement.


Favourable dynamics&nbsp;benefitting&nbsp;pet food business


An earnings bright spot, the pet food business continues to benefit from tight supply and a surge in demand, driven by pandemic pet adoption rates. We lift our Food Ingredients earnings forecasts, although expect a margin to be competed back to more normal levels over time.



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





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



Scales: A Shortage of Pickers Prunes Margin

Scales Corp Ltd

Scales: A Shortage of Pickers Prunes Margin