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>Transport Titbits —&nbsp;Domestic Freight Recovering</h2>
Heavy vehicle traffic is recovering. During the week to 9 May, traffic measured on state highways was just -19% down on the same week last year, a considerable improvement on the -60% decline during the depths of Alert Level 4 in April. The improvement is supported by anecdotal feedback from industry participants, which we expect to continue as New Zealand enters Alert Level 2. However, we are wary of a false recovery in light of an element of supply chain catch-up, which is likely to temporarily boost activity levels. &nbsp;&nbsp;
Both Freightways (FRE) and Mainfreight (MFT) highlighted in separate trading updates in early April that their respective businesses had been severely impacted. FRE suggested domestic parcel network volumes had fallen -65%, while MFT’s domestic revenue was down -40%. However, both will have seen meaningful recoveries since as heavy vehicle traffic data provides a good proxy for their respective activity levels.&nbsp;&nbsp;
In particular, e-commerce volumes have exploded with parcel volumes significantly up on the prior year. FRE has said that its recent volumes have been up +110%, at levels usually seen in the pre-Christmas peak. Providing sufficient parcel delivery supply has been challenging for industry participants, particularly those with a greater B2C (business to consumer) customer base/business mix. With physical retail opening up under Alert Level 2, the level of e-commerce activity is likely to fall back, but should remain elevated relative to pre-COVID-19 levels.
General freight should continue to improve given increasing consumer activity though we are wary that the economic consequences of COVID-19 will be long-dated and therefore a full recovery will take time. Two thirds of freight/logistics respondents to our recent NZ business survey suggested that their businesses (1) applied for the government’s wage subsidy, and (2) expect redundancies to feature.&nbsp;&nbsp;Hopefully this isn’t the case though history shows that those participants with competitive advantage tend to advance their competitive positions in downturns. &nbsp;
Transport Titbits Chart:&nbsp;Heavy vehicle traffic volumes against prior year&nbsp;
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1666617295089658678&amp;th=172103998a576b36&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ8AnfBVWpvT5Qhc-OE5IErvg4BAiQoqHxoi4CJZrLdYYhuxvUTmKMdegHBClGifQSzjOv2Opx_MrHC3Gaxk_WxK9r7r4HO8RXOjyGIiFv2n3NV6bcD5cF88D60&amp;disp=emb" width="488" height="303" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: NZTA, Forsyth Barr analysis
Andy Bowley&nbsp; Head of Research Forsyth Barr Limited
M: +64 21 338 941 |P: +64 4 495 8246 | TF:0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Transport Titbits —&nbsp;Domestic Freight Recovering
Heavy vehicle traffic is recovering. During the week to 9 May, traffic measured on state highways was just -19% down on the same week last year, a considerable improvement on the -60% decline during the depths of Alert Level 4 in April. The improvement is supported by anecdotal feedback from industry participants, which we expect to continue as New Zealand enters Alert Level 2. However, we are wary of a false recovery in light of an element of supply chain catch-up, which is likely to temporarily boost activity levels. &nbsp;&nbsp;
Both Freightways (FRE) and Mainfreight (MFT) highlighted in separate trading updates in early April that their respective businesses had been severely impacted. FRE suggested domestic parcel network volumes had fallen -65%, while MFT’s domestic revenue was down -40%. However, both will have seen meaningful recoveries since as heavy vehicle traffic data provides a good proxy for their respective activity levels.&nbsp;&nbsp;
In particular, e-commerce volumes have exploded with parcel volumes significantly up on the prior year. FRE has said that its recent volumes have been up +110%, at levels usually seen in the pre-Christmas peak. Providing sufficient parcel delivery supply has been challenging for industry participants, particularly those with a greater B2C (business to consumer) customer base/business mix. With physical retail opening up under Alert Level 2, the level of e-commerce activity is likely to fall back, but should remain elevated relative to pre-COVID-19 levels.
General freight should continue to improve given increasing consumer activity though we are wary that the economic consequences of COVID-19 will be long-dated and therefore a full recovery will take time. Two thirds of freight/logistics respondents to our recent NZ business survey suggested that their businesses (1) applied for the government’s wage subsidy, and (2) expect redundancies to feature.&nbsp;&nbsp;Hopefully this isn’t the case though history shows that those participants with competitive advantage tend to advance their competitive positions in downturns. &nbsp;
Transport Titbits Chart:&nbsp;Heavy vehicle traffic volumes against prior year&nbsp;

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

Transport Titbits — Domestic Freight Recovering

<h2>Freightways</h2>
Feeling the Chill
NEUTRAL
Freightways'&nbsp;(FRE) revenue is falling dramatically during the domestic&nbsp;COVID-19 lock-down, but profitability is partially protected by a variable contractor base, wage subsidy support from the government, and a temporary&nbsp;reduction in employee wages. When the lock-down ends, the economic ramifications will likely suppress medium term demand, thereby spilling the earnings impact&nbsp;into FY21 and beyond. Earnings downgrades are partially mitigated by the accretion provided by the Bill Chill deal, which has now completed. While originally intended to be debt funded,&nbsp;FRE&nbsp;has protected its balance sheet by a recent fully underwritten&nbsp;DRP&nbsp;(dividend reinvestment plan) and a cash for share switch on part of the purchase consideration. Following our earnings forecast downgrades,&nbsp;FRE&nbsp;trades at a one year forward PE of ~16x on depressed earnings. It's difficult to compare this against both domestic and international peers at this time given the very uncertain&nbsp;near term outlook and the lagged nature of consensus forecasts to current and future trading conditions.&nbsp;However, taking a historic view of&nbsp;FRE's&nbsp;relative valuation we believe this is fair and therefore retain a NEUTRAL rating.
<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$5.62</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">61.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">49.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">60.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">71.2&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">9.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.9&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$6.40</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">39.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">31.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">36.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">43.0&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">11.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.8&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;">2.2</td>
<td style="text-align: left; width: 42.6pt;">-21.1</td>
<td style="text-align: left; width: 43.2pt;">17.2</td>
<td style="text-align: left; width: 48pt;">18.5&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">14.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">18.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">15.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">13.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">165.4m</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;">23.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">27.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">32.3&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$930m</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;">5.4</td>
<td style="text-align: left; width: 42.6pt;">4.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.7&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">129.0k (NZ$1,020k)</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;">7.5</td>
<td style="text-align: left; width: 42.6pt;">5.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">6.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.0&nbsp;</td>
</tr>
</tbody>
</table>
Key changes
<ul type="disc">
<li>Earnings forecasts: Material underlying reductions through outlook period&nbsp;partially mitigated by Big Chill earnings accretion</li>
<li>Target price: Lowered from NZ$8.00 to NZ$6.40</li>
</ul>
Trading activity hit by lock-down
FRE was navigating COVID-19 well until the Level 4 lock-down was imposed. Prior to lock-down parcel volumes in March were up +3% against the prior year, but hub and spoke volumes (ex-messenger Services, which incorporates the Countdown contract) have since fallen by -65%. The re-opening of some ecommerce product lines will assist, but activity levels will remain depressed until the lock-down ends. Thereafter, the damper economic climate will weigh on activity levels. FRE has some cost levers available to mitigate the earnings impact, albeit profitability will fall materially through 2H20 and into FY21.&nbsp;
Big Chill consolidated&nbsp;
FRE has completed the acquisition of Big Chill. We estimate the deal is immediately EPS accretive (by around +7%), albeit FRE still has to pay ~20% of the purchase price in FY23. As an essential service Big Chill is "trading well" through the lock-down, albeit the channel shift from foodservice to supermarket will mean more bulk deliveries and less higher margin local deliveries.&nbsp;
Balance sheet&nbsp;protected&nbsp;
A cash for shares switch for part of the Big Chill purchase consideration and the fully underwritten interim&nbsp;DRP&nbsp;means&nbsp;FRE's&nbsp;balance sheet has ample capacity for an extended downturn. We estimate FY21 net debt/EBITDA of ~1.8x vs debt covenants at ~3.25x.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Freightways
Feeling the Chill
NEUTRAL
Freightways'&nbsp;(FRE) revenue is falling dramatically during the domestic&nbsp;COVID-19 lock-down, but profitability is partially protected by a variable contractor base, wage subsidy support from the government, and a temporary&nbsp;reduction in employee wages. When the lock-down ends, the economic ramifications will likely suppress medium term demand, thereby spilling the earnings impact&nbsp;into FY21 and beyond. Earnings downgrades are partially mitigated by the accretion provided by the Bill Chill deal, which has now completed. While originally intended to be debt funded,&nbsp;FRE&nbsp;has protected its balance sheet by a recent fully underwritten&nbsp;DRP&nbsp;(dividend reinvestment plan) and a cash for share switch on part of the purchase consideration. Following our earnings forecast downgrades,&nbsp;FRE&nbsp;trades at a one year forward PE of ~16x on depressed earnings. It's difficult to compare this against both domestic and international peers at this time given the very uncertain&nbsp;near term outlook and the lagged nature of consensus forecasts to current and future trading conditions.&nbsp;However, taking a historic view of&nbsp;FRE's&nbsp;relative valuation we believe this is fair and therefore retain a NEUTRAL rating.
         


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


Share price
NZ$5.62
NPAT* (NZ$m)
61.0&nbsp;
49.0&nbsp;
60.1&nbsp;
71.2&nbsp;
EV/EBITDA
9.6&nbsp;
8.3&nbsp;
7.5&nbsp;
6.9&nbsp;


Target price
NZ$6.40
EPS* (NZc)
39.3&nbsp;
31.0&nbsp;
36.3&nbsp;
43.0&nbsp;
EV/EBIT
11.2&nbsp;
12.7&nbsp;
11.1&nbsp;
9.8&nbsp;


Risk rating
Medium
EPS growth* (%)
2.2
-21.1
17.2
18.5&nbsp;
PE
14.3&nbsp;
18.1&nbsp;
15.5&nbsp;
13.1&nbsp;


Issued shares
165.4m
DPS (NZc)
30.5&nbsp;
23.0&nbsp;
27.3&nbsp;
32.3&nbsp;
Price/NTA
n/a
n/a
n/a
n/a


Market cap
NZ$930m
Imputation (%)
100
100
100
100
Cash div yld (%)
5.4
4.1&nbsp;
4.8&nbsp;
5.7&nbsp;


Avg daily turnover
129.0k (NZ$1,020k)
*Based on normalised profits


Gross div yld (%)
7.5
5.7&nbsp;
6.7&nbsp;
8.0&nbsp;



Key changes

Earnings forecasts: Material underlying reductions through outlook period&nbsp;partially mitigated by Big Chill earnings accretion
Target price: Lowered from NZ$8.00 to NZ$6.40

Trading activity hit by lock-down
FRE was navigating COVID-19 well until the Level 4 lock-down was imposed. Prior to lock-down parcel volumes in March were up +3% against the prior year, but hub and spoke volumes (ex-messenger Services, which incorporates the Countdown contract) have since fallen by -65%. The re-opening of some ecommerce product lines will assist, but activity levels will remain depressed until the lock-down ends. Thereafter, the damper economic climate will weigh on activity levels. FRE has some cost levers available to mitigate the earnings impact, albeit profitability will fall materially through 2H20 and into FY21.&nbsp;
Big Chill consolidated&nbsp;
FRE has completed the acquisition of Big Chill. We estimate the deal is immediately EPS accretive (by around +7%), albeit FRE still has to pay ~20% of the purchase price in FY23. As an essential service Big Chill is "trading well" through the lock-down, albeit the channel shift from foodservice to supermarket will mean more bulk deliveries and less higher margin local deliveries.&nbsp;
Balance sheet&nbsp;protected&nbsp;
A cash for shares switch for part of the Big Chill purchase consideration and the fully underwritten interim&nbsp;DRP&nbsp;means&nbsp;FRE's&nbsp;balance sheet has ample capacity for an extended downturn. We estimate FY21 net debt/EBITDA of ~1.8x vs debt covenants at ~3.25x.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

<h2>Transport Trends</h2>
The Biggest Black Swan
COVID-19 has, and will&nbsp;continue&nbsp;to, impact all transport sector players to varying degrees; the near term outlook looks bleak. Hardest hit will be international aviation given border closures for the foreseeable&nbsp;future. This will have a knock-on impact on domestic aviation, as will the domestic&nbsp;lock down, which&nbsp;will also impact other industry segments. Freight for non-essential services essentially stops for the lock-down period. Essential services freight will ensure that freight forwarders, logistics companies and ports will remain operational but at vastly reduced activity levels. Industry profitability will be hit hard; dividends will suffer as a result. Earnings guidance has been uniformly suspended. The&nbsp;balance sheets of the listed players are in reasonable shape, however Air New Zealand (AIR) is most at risk of requiring&nbsp;recapitalisation. We have a preference for&nbsp;Mainfreight&nbsp;(MFT) and&nbsp;Freightways&nbsp;(FRE) in the sector, albeit we recognise that both likely&nbsp;face a meaningful contraction in earnings over the next 12 months.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/125/834/original/image_39317227021585701061582.png?1585701064" class="editor-image img-responsive" data-smartkarma-image-id="125834"></figure>
Key transport trends and themes
We acknowledge that most historic data sets are now largely redundant, and therefore key themes across airports and airlines, roads and rail, and ports and shipping identified in this edition of Transport Trends focus on very recent changes in operating conditions:
<ul type="disc">
<li>Air passenger capacity and traffic&nbsp;has fallen by previously unthinkable rates. The outlook is grim for airlines in light&nbsp;of border closures, domestic lock-downs and potential heightened consumer apathy to air travel. It not much better for&nbsp;airports, albeit they are typically subject to less balance sheet stress.&nbsp;</li>
<li>Domestic freight&nbsp;growth had recovered&nbsp;through the December quarter and early 2020, but now it&nbsp;faces a lock-down activity drop, despite some exposure to essential services, and medium term challenges from economic headwinds both domestically and offshore.&nbsp;</li>
<li>Air freight&nbsp;has piggy-backed the boom in passenger travel in recent years but now faces steep rate increases from constrained capacity as the holds of passenger-less aircraft are being used as freighters. This provides a marginal benefit to airlines&nbsp;that are otherwise&nbsp;haemorrhaging&nbsp;cash given their heavy&nbsp;fixed overheads.&nbsp;</li>
</ul>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Transport Trends
The Biggest Black Swan
COVID-19 has, and will&nbsp;continue&nbsp;to, impact all transport sector players to varying degrees; the near term outlook looks bleak. Hardest hit will be international aviation given border closures for the foreseeable&nbsp;future. This will have a knock-on impact on domestic aviation, as will the domestic&nbsp;lock down, which&nbsp;will also impact other industry segments. Freight for non-essential services essentially stops for the lock-down period. Essential services freight will ensure that freight forwarders, logistics companies and ports will remain operational but at vastly reduced activity levels. Industry profitability will be hit hard; dividends will suffer as a result. Earnings guidance has been uniformly suspended. The&nbsp;balance sheets of the listed players are in reasonable shape, however Air New Zealand (AIR) is most at risk of requiring&nbsp;recapitalisation. We have a preference for&nbsp;Mainfreight&nbsp;(MFT) and&nbsp;Freightways&nbsp;(FRE) in the sector, albeit we recognise that both likely&nbsp;face a meaningful contraction in earnings over the next 12 months.

Key transport trends and themes
We acknowledge that most historic data sets are now largely redundant, and therefore key themes across airports and airlines, roads and rail, and ports and shipping identified in this edition of Transport Trends focus on very recent changes in operating conditions:

Air passenger capacity and traffic&nbsp;has fallen by previously unthinkable rates. The outlook is grim for airlines in light&nbsp;of border closures, domestic lock-downs and potential heightened consumer apathy to air travel. It not much better for&nbsp;airports, albeit they are typically subject to less balance sheet stress.&nbsp;
Domestic freight&nbsp;growth had recovered&nbsp;through the December quarter and early 2020, but now it&nbsp;faces a lock-down activity drop, despite some exposure to essential services, and medium term challenges from economic headwinds both domestically and offshore.&nbsp;
Air freight&nbsp;has piggy-backed the boom in passenger travel in recent years but now faces steep rate increases from constrained capacity as the holds of passenger-less aircraft are being used as freighters. This provides a marginal benefit to airlines&nbsp;that are otherwise&nbsp;haemorrhaging&nbsp;cash given their heavy&nbsp;fixed overheads.&nbsp;

Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

<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

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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