New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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.

Equity Bottom-Up

<h2>Freightways</h2>
1H20&nbsp;— A Slower Delivery&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
NEUTRAL &nbsp;
Freightways&nbsp;(FRE) reported a disappointing&nbsp;1H20 result impacted by parcel volumes declines and further margin woes in Information Management. Revenue momentum is the slowest since the&nbsp;GFC&nbsp;(global financial crisis). While margins are stable to positive in Express Package, despite increased postal competition from NZ Post, the Information Management division has been dented by lower paper prices, further losses in its 'copy and print' business and a more subdued period for its digitisation operations. Some relief should come during 2H20 in the form of (1) recent restructuring moves to lower the cost base, and (2) the commencement of a major digitisation project in Australia. Moreover, FY21 earnings should recover further from the pricing for effort initiative and the cycling of a number of one offs in FY20, however, the risk to the&nbsp;earnings growth outlook is to the downside, in our opinion. The two years plus earnings downgrade cycle may not yet be over.&nbsp;FRE&nbsp;is trading at a one year forward PE of ~20x. After adjusting for the soon to be completed Big Chill acquisition, this should fall to ~18x. We believe this is fair risk/reward for&nbsp;FRE&nbsp;in light of its increasingly hazy earnings outlook. We retain a NEUTRAL rating.&nbsp;
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">FRE</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$8.05</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">61.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">57.2</td>
<td style="text-align: left; width: 43.2pt;">63.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">69.6&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">12.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.3</td>
<td style="text-align: left; width: 42.6pt;">8.8&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$8.00</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">39.4</td>
<td style="text-align: left; width: 42.6pt;">37.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">40.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">45.0&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">14.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">13.4</td>
<td style="text-align: left; width: 42.6pt;">12.5&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">2.4</td>
<td style="text-align: left; width: 42.6pt;">-6.2&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">10.5</td>
<td style="text-align: left; width: 48pt;">10.1&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">20.4</td>
<td style="text-align: left; width: 42.6pt;">21.8</td>
<td style="text-align: left; width: 48pt;">19.7</td>
<td style="text-align: left; width: 42.6pt;">17.9</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">154.8m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">30.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">30.5&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">30.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">33.7&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$1,246m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">3.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">125.2k (NZ$1,028k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">5.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.8&nbsp;</td>
</tr>
</tbody>
</table>
What's changed?&nbsp;
<ul type="disc">
<li>Earnings: Underlying&nbsp;EBITDA&nbsp;forecast&nbsp;cut by -3% in FY20; our forecasts now incorporate&nbsp;IFRS&nbsp;16 for the first time</li>
<li>Target price: Reduced from NZ$8.10 to NZ$8.00</li>
</ul>
Revenue inflection&nbsp;
FRE has benefited over recent years from a supportive domestic economic backdrop and consistent market share gains. Group revenue growth has averaged ~+7% over the past 10 years (inclusive of ~+2% relating from M&amp;A). The tables have turned on both fronts. A less supportive New Zealand economy has created a volume drag and the more commercial approach being taken by NZ Post is hampering FRE's competitive advantage in its core parcels business, in our opinion. While the former is cyclical, the latter is structural and will make it harder for FRE to generate the level of success it has historically enjoyed. Historic organic revenue growth may no longer be a good proxy for the future.&nbsp;
Key initiatives to drive margin enhancement; structural headwinds remain&nbsp;
Key management initiatives (including pricing for effort, route productivity, and medical waste) are being drowned out by a number of headwinds; some temporary, some structural. As the temporary ones subside (including one-off aircraft easing costs and restructuring costs) the margin opportunity should become more apparent in both Express Package and Information Management. However, the secular headwinds, including a more competitive playing field and lower paper prices (back in line with historic averages), will remain, in our opinion. The potential for major digitisation projects offer a boost to near term earnings but may not be sustainable over the longer term.&nbsp;

Freightways
1H20&nbsp;— A Slower Delivery&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
NEUTRAL &nbsp;
Freightways&nbsp;(FRE) reported a disappointing&nbsp;1H20 result impacted by parcel volumes declines and further margin woes in Information Management. Revenue momentum is the slowest since the&nbsp;GFC&nbsp;(global financial crisis). While margins are stable to positive in Express Package, despite increased postal competition from NZ Post, the Information Management division has been dented by lower paper prices, further losses in its 'copy and print' business and a more subdued period for its digitisation operations. Some relief should come during 2H20 in the form of (1) recent restructuring moves to lower the cost base, and (2) the commencement of a major digitisation project in Australia. Moreover, FY21 earnings should recover further from the pricing for effort initiative and the cycling of a number of one offs in FY20, however, the risk to the&nbsp;earnings growth outlook is to the downside, in our opinion. The two years plus earnings downgrade cycle may not yet be over.&nbsp;FRE&nbsp;is trading at a one year forward PE of ~20x. After adjusting for the soon to be completed Big Chill acquisition, this should fall to ~18x. We believe this is fair risk/reward for&nbsp;FRE&nbsp;in light of its increasingly hazy earnings outlook. We retain a NEUTRAL rating.&nbsp;
         


NZX Code
FRE
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$8.05
NPAT* (NZ$m)
61.0&nbsp;
57.2
63.3&nbsp;
69.6&nbsp;
EV/EBITDA
12.5&nbsp;
9.8&nbsp;
9.3
8.8&nbsp;


Target Price
NZ$8.00
EPS* (NZc)
39.4
37.0&nbsp;
40.9&nbsp;
45.0&nbsp;
EV/EBIT
14.4&nbsp;
14.4&nbsp;
13.4
12.5&nbsp;


Risk rating
Medium
EPS growth* (%)
2.4
-6.2&nbsp;
10.5
10.1&nbsp;
PE
20.4
21.8
19.7
17.9


Issued shares
154.8m
DPS (NZc)
30.5&nbsp;
30.5&nbsp;
30.7&nbsp;
33.7&nbsp;
Price/NTA
n/a
n/a
n/a
n/a


Market cap
NZ$1,246m
Imputation (%)
100
100
100
100
Cash div yld (%)
3.8&nbsp;
3.8&nbsp;
3.8&nbsp;
4.2&nbsp;


Avg daily turnover
125.2k (NZ$1,028k)
*Based on normalised profits


Gross div yld (%)
5.3&nbsp;
5.3&nbsp;
5.3&nbsp;
5.8&nbsp;



What's changed?&nbsp;

Earnings: Underlying&nbsp;EBITDA&nbsp;forecast&nbsp;cut by -3% in FY20; our forecasts now incorporate&nbsp;IFRS&nbsp;16 for the first time
Target price: Reduced from NZ$8.10 to NZ$8.00

Revenue inflection&nbsp;
FRE has benefited over recent years from a supportive domestic economic backdrop and consistent market share gains. Group revenue growth has averaged ~+7% over the past 10 years (inclusive of ~+2% relating from M&amp;A). The tables have turned on both fronts. A less supportive New Zealand economy has created a volume drag and the more commercial approach being taken by NZ Post is hampering FRE's competitive advantage in its core parcels business, in our opinion. While the former is cyclical, the latter is structural and will make it harder for FRE to generate the level of success it has historically enjoyed. Historic organic revenue growth may no longer be a good proxy for the future.&nbsp;
Key initiatives to drive margin enhancement; structural headwinds remain&nbsp;
Key management initiatives (including pricing for effort, route productivity, and medical waste) are being drowned out by a number of headwinds; some temporary, some structural. As the temporary ones subside (including one-off aircraft easing costs and restructuring costs) the margin opportunity should become more apparent in both Express Package and Information Management. However, the secular headwinds, including a more competitive playing field and lower paper prices (back in line with historic averages), will remain, in our opinion. The potential for major digitisation projects offer a boost to near term earnings but may not be sustainable over the longer term.&nbsp;

<h2>Freightways&nbsp;</h2>
1H20 Result Initial Impressions
Freightways (FRE) reported a soft first half result impacted by lower volumes in Express Package and further margin degradation in Information Management. Underlying NPAT (prior to IFRS 16 adjustments) was down -6% to NZ$30.3m on revenue growth of +1%. Non-cash IFRS 16 knocked a further -NZ$1.1m of this, or -4%.
Key points:
<ul>
<li>Express Package revenue growth of +1.8% despite a c.-1% decline in volumes. The volume decline trend appears to be improving. Divisional margins are stable.</li>
<li>The pricing for effort strategy has made some headway with a December uplift on residential parcels of NZ$0.66 per parcel, up from NZ$0.55 in October.</li>
<li>Information Management had another tough period with EBITA down -25% on flat revenue. Lower paper prices and reduced volumes through FRE’s print and copy bureaus have impacted performance in Australia. The division commenced a major digitation project in late January, which should assist performance through 2H20 and into FY21.</li>
<li>FRE continues to wait for OIO approval for its acquisition of Big Chill.</li>
<li>The company will pay an interim dividend of 15cps (flat on last year).</li>
</ul>
Outlook
FRE doesn’t provide earnings guidance, however at its FY19 result in August 2019 it said then that it was “targeting year-on-year earnings growth in 2020”. The omission of this in the 1H20 outlook commentary suggests that a second half rebound is unlikely and therefore market expectations will need to be tempered. &nbsp;
Capex guidance for FY20 has increased marginally to NZ$25m –NZ$26m.
Our view
We expect market earnings expectations to fall following the 1H20 result, reflecting a combination of a weaker than anticipated underlying performance, and the incorporation of IFRS 16 into forecasts for the first time.
Result summary (NZ$m) – 1H20 incorporate IFRS 16
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 170.4pt;"></td>
<td style="width: 49.4pt;">
1H19
</td>
<td style="width: 52.4pt;">
1H20
</td>
<td style="width: 52.4pt;">
Change
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Profit and loss account
</td>
<td style="width: 49.4pt;"></td>
<td style="width: 52.4pt;"></td>
<td style="width: 52.4pt;"></td>
</tr>
<tr>
<td style="width: 170.4pt;">
Sales revenue
</td>
<td style="width: 49.4pt;">
314.8
</td>
<td style="width: 52.4pt;">
318.9
</td>
<td style="width: 52.4pt;">
2.6%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Express Package &amp; Business Mail
</td>
<td style="width: 49.4pt;">
42.4
</td>
<td style="width: 52.4pt;">
49.8
</td>
<td style="width: 52.4pt;">
4.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Information Management
</td>
<td style="width: 49.4pt;">
17.6
</td>
<td style="width: 52.4pt;">
23.0
</td>
<td style="width: 52.4pt;">
-6.3%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Corporate &amp; Other
</td>
<td style="width: 49.4pt;">
(1.8)
</td>
<td style="width: 52.4pt;">
(1.6)
</td>
<td style="width: 52.4pt;">
-16.2%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
EBITDA
</td>
<td style="width: 49.4pt;">
58.2
</td>
<td style="width: 52.4pt;">
71.3
</td>
<td style="width: 52.4pt;">
1.5%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Depreciation and amortisation
</td>
<td style="width: 49.4pt;">
(7.5)
</td>
<td style="width: 52.4pt;">
(21.2)
</td>
<td style="width: 52.4pt;">
5.4%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Acquisition amortisation
</td>
<td style="width: 49.4pt;">
(1.0)
</td>
<td style="width: 52.4pt;">
(1.2)
</td>
<td style="width: 52.4pt;">
9.6%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
One-time items
</td>
<td style="width: 49.4pt;">
1.4
</td>
<td style="width: 52.4pt;">
0.0
</td>
<td style="width: 52.4pt;">
n/a
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Interest expense
</td>
<td style="width: 49.4pt;">
(5.0)
</td>
<td style="width: 52.4pt;">
(8.5)
</td>
<td style="width: 52.4pt;">
-10.2%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Profit before tax
</td>
<td style="width: 49.4pt;">
46.1
</td>
<td style="width: 52.4pt;">
40.4
</td>
<td style="width: 52.4pt;">
-1.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Taxation
</td>
<td style="width: 49.4pt;">
(12.7)
</td>
<td style="width: 52.4pt;">
(11.2)
</td>
<td style="width: 52.4pt;">
3.1%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Reported NPAT
</td>
<td style="width: 49.4pt;">
33.4
</td>
<td style="width: 52.4pt;">
29.2
</td>
<td style="width: 52.4pt;">
-2.6%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Abnormals (post tax)
</td>
<td style="width: 49.4pt;">
(0.4)
</td>
<td style="width: 52.4pt;">
0.0
</td>
<td style="width: 52.4pt;">
-100.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Underlying NPAT
</td>
<td style="width: 49.4pt;">
33.0
</td>
<td style="width: 52.4pt;">
29.2
</td>
<td style="width: 52.4pt;">
-1.5%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Underlying EPS (cents)
</td>
<td style="width: 49.4pt;">
21.3
</td>
<td style="width: 52.4pt;">
18.8
</td>
<td style="width: 52.4pt;">
-1.5%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Interim DPS (cents)
</td>
<td style="width: 49.4pt;">
15.00
</td>
<td style="width: 52.4pt;">
15.00
</td>
<td style="width: 52.4pt;">
0.0%
</td>
</tr>
</tbody>
</table>
Source: FRE, Forsyth Barr analysis
Andy Bowley&nbsp; Head of Research
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Freightways&nbsp;
1H20 Result Initial Impressions
Freightways (FRE) reported a soft first half result impacted by lower volumes in Express Package and further margin degradation in Information Management. Underlying NPAT (prior to IFRS 16 adjustments) was down -6% to NZ$30.3m on revenue growth of +1%. Non-cash IFRS 16 knocked a further -NZ$1.1m of this, or -4%.
Key points:

Express Package revenue growth of +1.8% despite a c.-1% decline in volumes. The volume decline trend appears to be improving. Divisional margins are stable.
The pricing for effort strategy has made some headway with a December uplift on residential parcels of NZ$0.66 per parcel, up from NZ$0.55 in October.
Information Management had another tough period with EBITA down -25% on flat revenue. Lower paper prices and reduced volumes through FRE’s print and copy bureaus have impacted performance in Australia. The division commenced a major digitation project in late January, which should assist performance through 2H20 and into FY21.
FRE continues to wait for OIO approval for its acquisition of Big Chill.
The company will pay an interim dividend of 15cps (flat on last year).

Outlook
FRE doesn’t provide earnings guidance, however at its FY19 result in August 2019 it said then that it was “targeting year-on-year earnings growth in 2020”. The omission of this in the 1H20 outlook commentary suggests that a second half rebound is unlikely and therefore market expectations will need to be tempered. &nbsp;
Capex guidance for FY20 has increased marginally to NZ$25m –NZ$26m.
Our view
We expect market earnings expectations to fall following the 1H20 result, reflecting a combination of a weaker than anticipated underlying performance, and the incorporation of IFRS 16 into forecasts for the first time.
Result summary (NZ$m) – 1H20 incorporate IFRS 16





1H19


1H20


Change




Profit and loss account







Sales revenue


314.8


318.9


2.6%




Express Package &amp; Business Mail


42.4


49.8


4.0%




Information Management


17.6


23.0


-6.3%




Corporate &amp; Other


(1.8)


(1.6)


-16.2%




EBITDA


58.2


71.3


1.5%




Depreciation and amortisation


(7.5)


(21.2)


5.4%




Acquisition amortisation


(1.0)


(1.2)


9.6%




One-time items


1.4


0.0


n/a




Interest expense


(5.0)


(8.5)


-10.2%




Profit before tax


46.1


40.4


-1.0%




Taxation


(12.7)


(11.2)


3.1%




Reported NPAT


33.4


29.2


-2.6%




Abnormals (post tax)


(0.4)


0.0


-100.0%




Underlying NPAT


33.0


29.2


-1.5%




Underlying EPS (cents)


21.3


18.8


-1.5%




Interim DPS (cents)


15.00


15.00


0.0%




Source: FRE, Forsyth Barr analysis
Andy Bowley&nbsp; Head of Research
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Freightways: 1H20 Result Initial Impressions

<h2>Freightways</h2>
1H20 Preview&nbsp;— Volume Hangover&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
NEUTRAL
We expect&nbsp;Freightways&nbsp;(FRE) to report a subdued set of numbers for its 1H20 period&nbsp;on 24 February 2020, reflecting a hangover of the mid-calendar year 2019 domestic activity slowdown and margin pressure in Information Management. Our estimates are prior to the introduction of&nbsp;IFRS&nbsp;16 (accounting for leases), which may also act as (a non-cash) headwind to earnings growth. Our existing forecasts for FY20 imply a vastly improved operating performance (2H20&nbsp;NPAT&nbsp;+8%), but suggests earnings risk remains to the downside.
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">FRE</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$8.40</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">61.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">62.9</td>
<td style="text-align: left; width: 48pt;">69.5</td>
<td style="text-align: left; width: 48pt;">75.0&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">13.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">12.5</td>
<td style="text-align: left; width: 48pt;">11.6</td>
<td style="text-align: left; width: 48pt;">11.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$8.10</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">39.4</td>
<td style="text-align: left; width: 48pt;">40.6</td>
<td style="text-align: left; width: 48pt;">44.9</td>
<td style="text-align: left; width: 48pt;">48.5</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">15.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">14.9</td>
<td style="text-align: left; width: 48pt;">13.7</td>
<td style="text-align: left; width: 48pt;">12.9&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">2.4</td>
<td style="text-align: left; width: 48pt;">2.4</td>
<td style="text-align: left; width: 48pt;">10.6</td>
<td style="text-align: left; width: 48pt;">7.9</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">21.3</td>
<td style="text-align: left; width: 48pt;">20.7</td>
<td style="text-align: left; width: 48pt;">18.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">17.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">154.8m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">30.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">30.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">33.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">36.4&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 48pt;">n/a</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$1,300m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">3.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.3</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">123.7k (NZ$1,015k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">5.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.6</td>
<td style="text-align: left; width: 48pt;">6.0&nbsp;</td>
</tr>
</tbody>
</table>
Key issues to consider at&nbsp;FRE's&nbsp;1H20 result&nbsp;
<ul type="disc">
<li>B2B (business-to-business) volumes: 1Q20 Express Package volumes were down -1.5%. While we expect an improved&nbsp;performance through 2Q20 we still expect a subdued volume backdrop for the half.&nbsp;</li>
<li>Big Chill acquisition: We have yet to consolidate Big Chill into our earnings estimates given limited financial information provided and uncertainty over deal completion&nbsp;timing. We look forward to an update.&nbsp;</li>
<li>​​​​​​​Pricing for effort:&nbsp;FRE&nbsp;has been disciplined in its enforcement of B2C (business-to-consumer) price increases with some margin benefit likely as a result, however, volume momentum will be impacted.&nbsp;&nbsp;</li>
<li>Information management margins: The first quarter trading update highlighted a -600bps drop in margins over the past two years. Management is targeting a +20% increase in improvement in Australian utilisation over the&nbsp; next two years, which should assist margin recovery.&nbsp;</li>
</ul>
Conference call details
FRE&nbsp;will host an analyst&nbsp;briefing at 11am on 24 February 2020, at our offices&nbsp;—&nbsp;Level 23,&nbsp;Lumley&nbsp;Centre, 88&nbsp;Shortland&nbsp;Street,&nbsp;Auckland.&nbsp;Dial-in for those unable to attend in person:&nbsp;NZ —&nbsp;0800&nbsp;452 937; Australia&nbsp;—&nbsp;1 800 803 167;&nbsp;passcode:&nbsp; 195 664 5013

Freightways
1H20 Preview&nbsp;— Volume Hangover&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
NEUTRAL
We expect&nbsp;Freightways&nbsp;(FRE) to report a subdued set of numbers for its 1H20 period&nbsp;on 24 February 2020, reflecting a hangover of the mid-calendar year 2019 domestic activity slowdown and margin pressure in Information Management. Our estimates are prior to the introduction of&nbsp;IFRS&nbsp;16 (accounting for leases), which may also act as (a non-cash) headwind to earnings growth. Our existing forecasts for FY20 imply a vastly improved operating performance (2H20&nbsp;NPAT&nbsp;+8%), but suggests earnings risk remains to the downside.



NZX Code
FRE
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$8.40
NPAT* (NZ$m)
61.0&nbsp;
62.9
69.5
75.0&nbsp;
EV/EBITDA
13.0&nbsp;
12.5
11.6
11.0&nbsp;


Target Price
NZ$8.10
EPS* (NZc)
39.4
40.6
44.9
48.5
EV/EBIT
15.0&nbsp;
14.9
13.7
12.9&nbsp;


Risk rating
Medium
EPS growth* (%)
2.4
2.4
10.6
7.9
PE
21.3
20.7
18.7&nbsp;
17.3&nbsp;


Issued shares
154.8m
DPS (NZc)
30.5&nbsp;
30.5&nbsp;
33.7&nbsp;
36.4&nbsp;
Price/NTA
n/a
n/a
n/a
n/a


Market cap
NZ$1,300m
Imputation (%)
100
100
100
100
Cash div yld (%)
3.6&nbsp;
3.6&nbsp;
4.0&nbsp;
4.3


Avg daily turnover
123.7k (NZ$1,015k)
*Based on normalised profits


Gross div yld (%)
5.0&nbsp;
5.0&nbsp;
5.6
6.0&nbsp;



Key issues to consider at&nbsp;FRE's&nbsp;1H20 result&nbsp;

B2B (business-to-business) volumes: 1Q20 Express Package volumes were down -1.5%. While we expect an improved&nbsp;performance through 2Q20 we still expect a subdued volume backdrop for the half.&nbsp;
Big Chill acquisition: We have yet to consolidate Big Chill into our earnings estimates given limited financial information provided and uncertainty over deal completion&nbsp;timing. We look forward to an update.&nbsp;
​​​​​​​Pricing for effort:&nbsp;FRE&nbsp;has been disciplined in its enforcement of B2C (business-to-consumer) price increases with some margin benefit likely as a result, however, volume momentum will be impacted.&nbsp;&nbsp;
Information management margins: The first quarter trading update highlighted a -600bps drop in margins over the past two years. Management is targeting a +20% increase in improvement in Australian utilisation over the&nbsp; next two years, which should assist margin recovery.&nbsp;

Conference call details
FRE&nbsp;will host an analyst&nbsp;briefing at 11am on 24 February 2020, at our offices&nbsp;—&nbsp;Level 23,&nbsp;Lumley&nbsp;Centre, 88&nbsp;Shortland&nbsp;Street,&nbsp;Auckland.&nbsp;Dial-in for those unable to attend in person:&nbsp;NZ —&nbsp;0800&nbsp;452 937; Australia&nbsp;—&nbsp;1 800 803 167;&nbsp;passcode:&nbsp; 195 664 5013


Freightways: 1H20 Preview — Volume Hangover 

<h2><a target="_blank">Transport Trends</a></h2>
Growth Inflection Point
The demand picture for freight and passenger services has stabilised following several quarters of successive slowing. Economic stimulus, both domestically and offshore, will be supportive to a moderately better volume backdrop through 2020, in our opinion. While current volumes are broadly flat year on year across different modes, price growth generally remains robust. The earnings growth outlook among listed players is mixed and will be partially held back by the slower start to FY20. Valuations remain elevated and continue to discount higher growth rates than are currently being generated. We retain a neutral to negative stance on the sector. Our favoured stocks are NEUTRAL rated Mainfreight (MFT) and Freightways (FRE).
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.0.1&amp;permmsgid=msg-f:1652650185234326922&amp;th=16ef64965ce0258a&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-7bItaa65FKHrXpyvs2WqWypQsqPLqeO6U1DOFtTKgMFB11J5G51CYbnCIcGejvCLgnibqyiFIE9QP6-v3Rt2oqtLp0knkHJuGncln2mRMiLKMvN-G2yC21KQ&amp;disp=emb" width="409" height="289" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Key transport trends and themes
Key themes across airports and airlines, roads and rail, and ports and shipping identified in Transport Trends include:
<ul>
<li>Log price recovery: Having fallen materially mid-year, export log prices have rebounded. This will help mitigate the negative impact on export volumes, which have slowed in recent months.</li>
<li>Traffic data stabilising: NZTA heavy vehicle data suggests domestic conditions have stabilised after a sustained downturn through 2019. The data is consistent with anecdotal industry feedback.</li>
<li>Aviation growth by the decade: The 2010s have bucked the long term international aviation growth deceleration trend with growth in excess of the 2000s. The 2020s is likely to revert to trend.&nbsp;</li>
</ul>
<div class="content-highlight">
Sector preferences
We summarise our sector stock ratings as follows:
<ul>
<li>OUTPERFORM: n/a</li>
<li>NEUTRAL: Air New Zealand, Freightways, Mainfreight, Napier Port</li>
<li>UNDERPERFORM: Auckland Airport, Port of Tauranga</li>
</ul>
</div>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Transport Trends
Growth Inflection Point
The demand picture for freight and passenger services has stabilised following several quarters of successive slowing. Economic stimulus, both domestically and offshore, will be supportive to a moderately better volume backdrop through 2020, in our opinion. While current volumes are broadly flat year on year across different modes, price growth generally remains robust. The earnings growth outlook among listed players is mixed and will be partially held back by the slower start to FY20. Valuations remain elevated and continue to discount higher growth rates than are currently being generated. We retain a neutral to negative stance on the sector. Our favoured stocks are NEUTRAL rated Mainfreight (MFT) and Freightways (FRE).

Key transport trends and themes
Key themes across airports and airlines, roads and rail, and ports and shipping identified in Transport Trends include:

Log price recovery: Having fallen materially mid-year, export log prices have rebounded. This will help mitigate the negative impact on export volumes, which have slowed in recent months.
Traffic data stabilising: NZTA heavy vehicle data suggests domestic conditions have stabilised after a sustained downturn through 2019. The data is consistent with anecdotal industry feedback.
Aviation growth by the decade: The 2010s have bucked the long term international aviation growth deceleration trend with growth in excess of the 2000s. The 2020s is likely to revert to trend.&nbsp;


Sector preferences
We summarise our sector stock ratings as follows:

OUTPERFORM: n/a
NEUTRAL: Air New Zealand, Freightways, Mainfreight, Napier Port
UNDERPERFORM: Auckland Airport, Port of Tauranga


Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Transport Trends: Growth Inflection Point

<h2><a target="_blank">Transport Sector</a></h2>
Counting Carbon Emissions
The New Zealand transport sector accounts for ~20% of New Zealand’s emissions profile, however, the listed NZX transport players represent only a small proportion of this. Most transport sector emissions stem from personal vehicle use. Airlines are heavy emitters, but still only represent ~5% of total New Zealand emissions. Air New Zealand (AIR) is most exposed to emissions among listed transport companies, albeit we believe its immediate financial risk is not material.
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.0.1&amp;permmsgid=msg-f:1652014353487488293&amp;th=16ed224d3f77e525&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ9DqO40g7SiLU3qAqS6obrdU975MahAW0B1LKq0zZ4b112RtRVN3qbyGm7Wu6LizTdWq86Jmpkj1n68vub001bYB-Y580gbb7LciLVo-qx7hm7kKiQMzBRz7C8&amp;disp=emb" width="400" height="265" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Air New Zealand (AIR) most exposed to carbon
AIR has the largest direct exposure to greenhouse gas emissions of any NZX company. Jet fuel accounts for ~99.5% of its emissions. From 1 January 2019, it has offset 100% of domestic emissions. From 2021 it will offset all international emissions growth. However, its overall financial burden will be limited at least in the near to medium term.
Mainfreight (MFT) yet to measure
MFT’s emissions largely stem from third party airlines, shipping lines and owner-drivers across its global network. Its ability to pass on cost increases in relation to carbon is high and therefore it earnings risk is limited, in our opinion. MFT does not yet disclose its carbon footprint, therefore, we estimate it in this report.
Auckland Airport’s (AIA) risk a function of airlines
AIA’s disclosed emissions profile is relatively small. However, the risk to its business from the broader sector’s emissions profile is high. It is actively working with airlines to help lower their emissions. Any demand implications from higher airfares or “flight shaming” consumer responses, will have an impact on AIA.
Freightways (FRE) perception high; reality low
FRE’s emissions are relatively low despite the fuel burn across its owner-driver fleet and parcel carrying aircraft. However, the perception of couriers being heavy emitters poses a risk. Its NZ Couriers and Kiwi Express brands both offset 100% of emissions with verified New Zealand carbon credits.<a target="_blank">&nbsp;</a>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Transport Sector
Counting Carbon Emissions
The New Zealand transport sector accounts for ~20% of New Zealand’s emissions profile, however, the listed NZX transport players represent only a small proportion of this. Most transport sector emissions stem from personal vehicle use. Airlines are heavy emitters, but still only represent ~5% of total New Zealand emissions. Air New Zealand (AIR) is most exposed to emissions among listed transport companies, albeit we believe its immediate financial risk is not material.

Air New Zealand (AIR) most exposed to carbon
AIR has the largest direct exposure to greenhouse gas emissions of any NZX company. Jet fuel accounts for ~99.5% of its emissions. From 1 January 2019, it has offset 100% of domestic emissions. From 2021 it will offset all international emissions growth. However, its overall financial burden will be limited at least in the near to medium term.
Mainfreight (MFT) yet to measure
MFT’s emissions largely stem from third party airlines, shipping lines and owner-drivers across its global network. Its ability to pass on cost increases in relation to carbon is high and therefore it earnings risk is limited, in our opinion. MFT does not yet disclose its carbon footprint, therefore, we estimate it in this report.
Auckland Airport’s (AIA) risk a function of airlines
AIA’s disclosed emissions profile is relatively small. However, the risk to its business from the broader sector’s emissions profile is high. It is actively working with airlines to help lower their emissions. Any demand implications from higher airfares or “flight shaming” consumer responses, will have an impact on AIA.
Freightways (FRE) perception high; reality low
FRE’s emissions are relatively low despite the fuel burn across its owner-driver fleet and parcel carrying aircraft. However, the perception of couriers being heavy emitters poses a risk. Its NZ Couriers and Kiwi Express brands both offset 100% of emissions with verified New Zealand carbon credits.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Transport Sector: Counting Carbon Emissions

New Zealand

Freightways Limited provides express package services throughout New Zealand along with providing information management and business mail services.  The Company's courier services includes same day and overnight national and international deliveries, freight forwarding services, computer media transport and payroll data deliveries.

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Freightways Ltd (FRE NZ)

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