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>Mainfreight&nbsp;</h2>
Cyclical Gear Change
Mainfreight’s (MFT) successful structural growth profile is not immune to cyclical downturns; after a phase of strong earnings growth we expect a slower pace ahead. Industry data and peer feedback point to softening conditions in all of MFT’s geographic regions. However, ‘a slower pace’ for MFT is still attractive relative to the wider market, in our opinion. MFT is trading broadly consistent with the NZX50 on a one year forward PE of ~24x. We retain a NEUTRAL rating.&nbsp;
What’s changed?
<ul>
<li>Earnings: FY20 NPAT cut by -4% and FY21 by -8%</li>
<li>Target Price:&nbsp;Lifted to NZ$37.00 to reflect further market rerating and lower WACC estimate, which more than offset our earnings cuts</li>
</ul>
Three core drivers; one slowing, two at full pace
MFT’s growth is a function of three drivers. First, the economic environment, which impacts same customer growth. Second, the company’s ability to win new customers. Third, its ability to cross-sell products and geographies to existing customers. All three of these drivers have influenced MFT’s above trend revenue growth over the past two years. However, the first is now slowing. Given this backdrop, continued successful execution on cross selling and winning new customers becomes more important to MFT. We are wary these may become more challenging in time, even with sales team investments, if others are fighting to hang on to volume should the environment deteriorate further.
Consensus downgrades likely
We assume MFT activity levels are subdued through FY20 and FY21, but that the company continues to grow, given cross-selling and customer win opportunities. Our revised FY22 NPAT forecast is now -8% below market consensus. However, our estimates still imply a three year compound annual NPAT growth rate of ~+9% through to FY22, versus the NZX50 at ~+5%. In light of building macro headwinds we expect consensus downgrades to be a feature through the upcoming 1H20 result on 13 November 2019.
Valuation on par with the market; fair
At ~24x one year forward PE MFT is not priced for a cyclical downturn. Yet, earnings risks are weighted to the downside, in our opinion. So why aren’t we more negative? Three reasons: (1) MFT is trading broadly at par with the NZX50, on our reduced estimates, yet still provides a more attractive growth profile over the next three years. (2) Its track record and quality attributes are difficult to ignore. (3) Since the GFC management has worked hard to create a more defensive customer mix with greater FMCG (fast moving consumer goods) and DIY exposure.&nbsp;
<div class="content-highlight">
Investment View
MFT is a global supply chain logistics provider with a difference. Its cultural identity, quality focus and dual obsessions of growth and network intensity have allowed it to successfully export its approach to Australia, the US, Asia and Europe. We like its key longer term attributes: (1) it has a high marginal return on capital; (2) well above average earnings growth, albeit lumpy at times; (3) it has proven to be adept to changes in market conditions; and (4) it has substantial global growth prospects. However, these positives are factored into its current share price. NEUTRAL.&nbsp;
</div>
Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Mainfreight&nbsp;
Cyclical Gear Change
Mainfreight’s (MFT) successful structural growth profile is not immune to cyclical downturns; after a phase of strong earnings growth we expect a slower pace ahead. Industry data and peer feedback point to softening conditions in all of MFT’s geographic regions. However, ‘a slower pace’ for MFT is still attractive relative to the wider market, in our opinion. MFT is trading broadly consistent with the NZX50 on a one year forward PE of ~24x. We retain a NEUTRAL rating.&nbsp;
What’s changed?

Earnings: FY20 NPAT cut by -4% and FY21 by -8%
Target Price:&nbsp;Lifted to NZ$37.00 to reflect further market rerating and lower WACC estimate, which more than offset our earnings cuts

Three core drivers; one slowing, two at full pace
MFT’s growth is a function of three drivers. First, the economic environment, which impacts same customer growth. Second, the company’s ability to win new customers. Third, its ability to cross-sell products and geographies to existing customers. All three of these drivers have influenced MFT’s above trend revenue growth over the past two years. However, the first is now slowing. Given this backdrop, continued successful execution on cross selling and winning new customers becomes more important to MFT. We are wary these may become more challenging in time, even with sales team investments, if others are fighting to hang on to volume should the environment deteriorate further.
Consensus downgrades likely
We assume MFT activity levels are subdued through FY20 and FY21, but that the company continues to grow, given cross-selling and customer win opportunities. Our revised FY22 NPAT forecast is now -8% below market consensus. However, our estimates still imply a three year compound annual NPAT growth rate of ~+9% through to FY22, versus the NZX50 at ~+5%. In light of building macro headwinds we expect consensus downgrades to be a feature through the upcoming 1H20 result on 13 November 2019.
Valuation on par with the market; fair
At ~24x one year forward PE MFT is not priced for a cyclical downturn. Yet, earnings risks are weighted to the downside, in our opinion. So why aren’t we more negative? Three reasons: (1) MFT is trading broadly at par with the NZX50, on our reduced estimates, yet still provides a more attractive growth profile over the next three years. (2) Its track record and quality attributes are difficult to ignore. (3) Since the GFC management has worked hard to create a more defensive customer mix with greater FMCG (fast moving consumer goods) and DIY exposure.&nbsp;

Investment View
MFT is a global supply chain logistics provider with a difference. Its cultural identity, quality focus and dual obsessions of growth and network intensity have allowed it to successfully export its approach to Australia, the US, Asia and Europe. We like its key longer term attributes: (1) it has a high marginal return on capital; (2) well above average earnings growth, albeit lumpy at times; (3) it has proven to be adept to changes in market conditions; and (4) it has substantial global growth prospects. However, these positives are factored into its current share price. NEUTRAL.&nbsp;

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

<h2>Transport Trends</h2>
Applying the Brakes
Anecdotal feedback and industry data support a broader softening of freight and passenger demand. The near term volume outlook is subdued and won’t be helped by above trend pricing growth across various modes, given cost pressures needing to be passed on. Operating deleverage (i.e. margin pressure) may be a feature over the next 12 months, if the softening volume story continues to play out. In contrast, sector valuations are close to record highs, thanks largely to low bond rates benefiting the transport infrastructure stocks. Our favoured sector plays are now Freightways (FRE) and Air New Zealand (AIR).
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>Heavy vehicle traffic falling: NZTA data shows that two of the past three months have shown a decline against the prior year. Industry feedback suggests softening activity across different freight modes.</li>
<li>Air NZ taking back international capacity share: Having lost share during the 2016–2017 aviation boom, Air NZ is now winning some of it back. It continues to pursue robust capacity growth despite softer demand.</li>
<li>Tauranga’s cargo gains: Port of Tauranga has gained significant share of Upper North Island import/export cargo from Ports of Auckland and Northport over the last few decades; share gains have accelerated in recent years, but will likely slow&nbsp; over the next 12 months.</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&nbsp;</li>
</ul>
</div>
Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Transport Trends
Applying the Brakes
Anecdotal feedback and industry data support a broader softening of freight and passenger demand. The near term volume outlook is subdued and won’t be helped by above trend pricing growth across various modes, given cost pressures needing to be passed on. Operating deleverage (i.e. margin pressure) may be a feature over the next 12 months, if the softening volume story continues to play out. In contrast, sector valuations are close to record highs, thanks largely to low bond rates benefiting the transport infrastructure stocks. Our favoured sector plays are now Freightways (FRE) and Air New Zealand (AIR).
Key transport trends and themes
Key themes across airports and airlines, roads and rail, and ports and shipping identified in Transport Trends include:

Heavy vehicle traffic falling: NZTA data shows that two of the past three months have shown a decline against the prior year. Industry feedback suggests softening activity across different freight modes.
Air NZ taking back international capacity share: Having lost share during the 2016–2017 aviation boom, Air NZ is now winning some of it back. It continues to pursue robust capacity growth despite softer demand.
Tauranga’s cargo gains: Port of Tauranga has gained significant share of Upper North Island import/export cargo from Ports of Auckland and Northport over the last few decades; share gains have accelerated in recent years, but will likely slow&nbsp; over the next 12 months.


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&nbsp;


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

New Zealand

Mainfreight Limited provides and supplies freight, warehousing and logistics services throughout New Zealand and Australia.  The Company provides freight forwarding services by road, rail, sea and air along with providing international freight forwarding services, customs clearance services and specialized handling of hazardous substances.

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Mainfreight Ltd (MFT NZ)

Mainfreight: Cyclical Gear Change

Mainfreight Cyclical Gear Change Mainfreight’s (MFT) successful structural growth profile is not immune to cyclical downturns; after a phase of...

Forsyth Barr

Transport Trends: Applying the Brakes

Transport Trends Applying the Brakes Anecdotal feedback and industry data support a broader softening of freight and passenger demand. The near...

Forsyth Barr

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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