Zespri. Vote for change and SunGold licence sales underpin a strong outlook COMPANY RESEARCH. Private Wealth Research

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1 COMPANY RESEARCH 8 MAY 218 Private Wealth Research Zespri Vote for change and SunGold licence sales underpin a strong outlook Key data Code Current price ZGL NZ$8.7 Over the past 6 months since our initiation report on Zespri (ZGL), shareholders have adopted a new constitution to address the misalignment between growers who supply kiwifruit to Zespri and people who own shares. ZGL has also announced results from the 218 Gold3 (SunGold) licence release that was above our estimates and provided a forecast NPAT range for 218/19. We have lifted our valuation range from $6.2-$9.5/share to $6.5-$1.2/share. Our base case is $8.2/share. FY19 PE ratio 6.2x FY19 net yield 13.8% Market cap (m) NZ$1,5m A new constitution looks to drive alignment between production and ownership of ZGL shares ZGL held a Special Meeting of Shareholders on 14 March 218 to ask shareholders to consider recommendations that aimed to strengthen grower ownership and control of ZGL. The changes to ZGL s constitution were backed by more than 75% of shareholders who voted. The new constitution puts in place a share cap with a maximum shareholding of four shares for each tray of production for active growers and introduces dividend restrictions on shareholders who do not grow kiwifruit. Revenue from 218 Gold3 (SunGold) licence release above our estimate and underpins a strong FY19 earnings and dividend outlook Revenue from the 218 Gold3 tender process, which will contribute to FY19 results, was $192m, up 95% from 217. This was driven by the number of hectares allocated lifting from 4 to 75 (7 hectares of Gold3 licence, and 5 hectares of Gold3 Organic new development licence) and an average sale price of $257k/hectare vs $246k/hectare in 217. We had forecast an avg price of $23k/hectare. The uplift in licence sales revenue underpins Zespri s forecast FY19 NPAT range of $17-$175m, up from $12m in FY18. ZGL expects to distribute dividends within the range of 8 to 9% of NPAT, which implies an FY19 dividend of $1.13-$1.3/share. Forecasts, valuation and risks Produced by: Chris Byrne Private Wealth Research We leave our FY18 NPAT forecast unchanged at $12m, but increase our FY19 NPAT 1% to $17m, due to increased prices paid for SunGold licences. Our DCF derived equity valuation is $1,125m-$1,76m that is then discounted by 3% given lack of liquidity in ZGL s shares to $79m-$1,23m. This reflects ZGL being a private company where only growers can acquire shares. Our base case valuation implies an FY19F PE of c6x and net yield of 14.5%. Risks include biosecurity, market access, competition, lower demand than forecast, product contamination and economic volatility. Year end March E 219E 22E EBIT ($m) Net profit ($m) EPS (cps) PER (x) DPS (cps) Net yield 2.8% 2.9% 8.4% 13.8% 14.% Source: Craigs Investment Partners, company data

2 ZGL Horticulture 31 March balance date Key valuation metrics FY16 FY17 FY18F FY19F FY2F Share price: $8.7 P/E Mkt cap ($m): NZ$1,5 Dividend yield (net) 2.9% 3.% 8.4% 13.8% 14.% DCF range: NZ$ /share Key ratios FY16 FY17F FY18F FY19F FY2F ROE (NPAT normalised/shf) 21.2% 45.8% 55.5% 77.1% 69.5% DCF assumptions Net interest cover (EBIT) (x) na na na na na WACC 9.2% RF rate 4.3% Net debt/book equity na na na na na Equity Beta 1.1 Term GR 2.% NTA per share (cents) Equity RP 6.5% Optg cash flow per share (cents) Revenue Breakdown (FY17) Profit & loss (NZ$m) FY16 FY17F FY18F FY19F FY2F Sales revenue 1,881 2,315 2,492 2,692 2,989 Sales growth 28.9% 23.1% 7.7% 8.% 11.1% EBITDA EBITDA/sales 2.8% 5.% 6.2% 9.4% 8.7% Depn & amort expense Other income EBIT % 4% EBIT/Sales 2.3% 4.5% 5.7% 8.9% 8.2% Net interest expense (2.9) (2.4) (2.4) (2.5) (2.9) NPBT Tax expense % NZ Kiwifruit Non NZ Supply New Cultivars Abnormals (A/T) Minorities Plus Equity Acc'td Earnings Valuation compcos Reported NPAT FY19 PE Shares (m) ZGL 6.2 EPS (reported) (cps) EPS (normalised) (cps) Delegat Group Ltd 17.3 EPS (normalised growth) 183.5% 29.1% 66.9% 1.8% Scales Corp Ltd 15.7 DPS (cps) Comvita Ltd 14.7 DPS/EPS (normalised) 14% 38% 87% 85% 85% New Zealand King Salmon Inve 21.4 Fonterra Shareholders Fund 1.1 Key cash flow items (NZ$m) FY16 FY17F FY18F FY19F FY2F Median 15.7 Cash flow from operations Capex (22.6) (14.6) (47.7) (38.8) (2.9) Free cash flow Other investing cash flows Dividends paid (14.5) (32.6) (9.5) (132.8) (144.3) Other equity cash flows Surplus cash (1.5) 31.8 (22.9) Key balance sheet items (NZ$m) FY16 FY17F FY18F FY19F FY2F Cash Net debt (165) (187) (164) (176) (199) Working capital Shareholders' funds Net tangible assets Total assets PRIVATE WEALTH RESEARCH / 2

3 Zespri shareholders vote to alter the constitution Zespri held a Special Meeting of Shareholders on 14 March 218 to ask shareholders to consider recommendations that aimed to strengthen grower ownership and control of Zespri. The main items voted on were: 1. A maximum shareholding of four shares for each tray of production for active growers. A producer would not be able to acquire more shares if they are overshared or if the acquisition would make them overshared. A producer that has been overshared for a continuous period of three years or more would have to dispose of their overshared shares. However, for those producers that are overshared as at the date the constitutional changes take effect, a transitional period of seven years will apply. 2. Dividend restrictions on shareholders who are no longer producing growers. A dividend would not be paid to a shareholder that is not a producer as at the record date for that dividend and has not been a producer for three years. However, for those who are dry at the time of the change in the constitution dividends would cease seven years after the change. Note that the Kiwifruit Export Regulations do not permit a requirement for dry shareholders to sell their shares. 3. A change to voting entitlements. To be based on one voting share for each tray of that property s production, or the number of shares the producer holds, whichever is the lesser. The changes to Zespri s constitution were backed by more than 75% of shareholders who voted. Gold3 (SunGold) licence release Revenue from the 218 Gold3 tender process, which will contribute to FY19 results, was $192m, up 95% from 217. This was driven by the number of hectares allocated lifting from 4 to 75 (7 hectares of Gold3 licence, and 5 hectares of Gold3 Organic new development licence) and an average sale price of $257k/hectare vs $246k/hectare in 217. We had forecast an avg price of $23k/hectare. We note that the median price (excl GST) for Gold3 was $265k/Hectare while the organic Gold3 was $19k/Hectare, resulting in the overall average of $257k/Hectare. The Gold3 price of $265k/Hectare was 13% above the 217 price despite supply being 75% ahead of 217 with 7 hectares released in 218 vs 4 in 217. The offer was again oversubscribed with the Gold3 tender (excluding organic) receiving 71 bids, with 474 being successful. However, this was down on 217 where ZGL received 938 bids and down from 1,81 bids in 216. Total hectares bid for also declined 16% to 179, from 1277 in the 217 process. PRIVATE WEALTH RESEARCH / 3

4 Figure 1: SunGold (Excl organic) licence sale prices ($/Hectare) 3 Figure 2: Licence sale revenues ($m) FY15 FY16 FY17 FY18 FY19 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Figure 3: SunGold licence volumes (Hectares) Figure 4: SunGold (excluding organic) total bids and successful bids Total hectares bid for (Ha) Licence Volumes (Ha) Total bids Successful bids FY16 FY17 FY18 FY19 FY17 FY18 FY19 Gold3 (SunGold) orchard gate return margin over green continues to climb The first indicative range for SunGold orchard gate returns (OGR) for the 218/219 season is $12,-$133,/hectare. The mid-point of this range is up 11% on last season. Importantly for the continued value of SunGold licences, the margin between Green OGR and SunGold OGR is forecast to increase by c2% to c$65k/hectare for the 218/219 season. Figure 5: Orchard gate returns ($k/hectare) Figure 6: Gold3 OGR margin over green ($k/hectare) Green Gold3, CIP PRIVATE WEALTH RESEARCH / 4

5 FY19 earnings guidance The uplift in licence sale revenue underpins Zespri s forecast NPAT range for FY19 of $17-$175m, up from $12m in FY18. ZGL expects to distribute dividends within the range of 8 to 9% of NPAT, which implies an FY19 dividend of $1.13-$1.3/share. We forecast FY19 NPAT of $17m and a dividend of $1.2/share based on an 85% payout ratio. Figure 7: ZGL NPAT ($m) Figure 8: ZGL DPS ($/share) $1.4 $1.2 $1. $.8 $.6 $.4 $.2 $. 214A 215A 216A 217A 218F 219F, CIP, CIP PRIVATE WEALTH RESEARCH / 5

6 Disclaimer This report is, prepared by Craigs Investment Partners Limited ( Craigs Investment Partners ), for circulation to kiwifruit growers in New Zealand. This report is not intended for distribution to any person outside New Zealand except in accordance with all the legal requirements of the relevant jurisdiction. While this report is based on information from sources which Craigs Investment Partners considers reliable, its accuracy and completeness cannot be guaranteed. Craigs Investment Partners, its partners and employees, do not accept liability for the results of any actions taken or not taken upon the basis of information in this report, or for any negligent misstatements, errors or omissions. Those acting upon information and recommendations do so entirely at their own risk. Craigs Investment Partners did not take into account the investment objectives, financial situation or particular needs of any particular person in the preparation of this report. Nothing in this report constitutes a representation that any investment strategy or recommendation is suitable to your individual circumstances or otherwise constitutes a personal recommendation. Accordingly, before making any investment decision Craigs Investment Partners recommends that you seek professional assistance from an investment adviser. Craigs Investment Partners and/or its partners and employees may, from time to time, have a financial interest in respect of some or all of the matters discussed. The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject, securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views contained in this research report. Craigs Investment Partners is the market maker for Zespri shares. PRIVATE WEALTH RESEARCH / 6