New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<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;

Freightways Ltd

Freightways: 1H20 — A Slower Delivery