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<br>1H22&nbsp;— Tracking a Better Delivery</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Freightways (FRE) continues to deliver reasons as to why it is well positioned to outperform the market. Its 1H22 result highlights an impressive 2Q22 recovery after a subdued lockdown impacted 1Q22. Pricing initiatives, secular growth, market share gains in all businesses, cost control, acquisitions, and we also recognise some pent-up demand from the first quarter, will have all contributed, more than offsetting rising cost pressures. The rate of growth will likely slow through 2H22 as cost inflation (labour and property) peak, however, the business is well placed to offset margin pressure heading into FY23 through its annual general rate increases. With a healthy set of operational and strategic levers in place and a growing track-record of delivery, we believe FRE deserves a premium valuation multiple relative to the market. On our revised earnings estimates, it currently trades at a small discount. OUTPERFORM.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22 EBITA lifted +2%&nbsp;but reversed in FY23</li>
<li><strong>Target price</strong>:&nbsp;Lowered to NZ$13.30 from NZ$13.75 to reflect a higher WACC estimate given the increase in the risk free rate</li>
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<h3>Revenue jump</h3>
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<p>FRE's&nbsp;very strong second quarter recovery after the COVID-19&nbsp;lockdowns&nbsp;in 1Q21&nbsp;was driven by strong revenue growth (partly pent-up demand), with robust parcel volumes, pricing initiatives, medical waste gains, and digitisation growth. Group growth was held back by subdued storage activity levels, the cycling of trans-Tasman aviation income in the prior year and below-normal business to business (B2B) volumes across the group.&nbsp;</p>
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<h3>Margin development more subdued</h3>
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<p>Margin development, particularly in parcels, was held back by adverse mix (business to consumer [B2C] parcels still offer lower margins than B2B), additional parcel capacity at short notice to meet demand, and elevated labour cost inflation. Cost pressures are unlikely to subside in 2H22, though pricing initiatives (management alluded to a parcel general rate increase of at least 6%) due in mid-2022 will assist margins in FY23.&nbsp;</p>
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<h3>Quality attributes becoming increasingly evident&nbsp;</h3>
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<p>Management's strategic toolkit is growing. Over the past few years it has reinvested in people (owner-driver earnings up a further +8% in the period), created a profitable B2C parcel business, expanded and will continue to expand its waste renewal operations into new waste/product categories, added value through M&amp;A, and maintained service performance leading to market share gains.&nbsp;</p>
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Freightways 1H22&nbsp;— Tracking a Better Delivery

OUTPERFORM
Freightways (FRE) continues to deliver reasons as to why it is well positioned to outperform the market. Its 1H22 result highlights an impressive 2Q22 recovery after a subdued lockdown impacted 1Q22. Pricing initiatives, secular growth, market share gains in all businesses, cost control, acquisitions, and we also recognise some pent-up demand from the first quarter, will have all contributed, more than offsetting rising cost pressures. The rate of growth will likely slow through 2H22 as cost inflation (labour and property) peak, however, the business is well placed to offset margin pressure heading into FY23 through its annual general rate increases. With a healthy set of operational and strategic levers in place and a growing track-record of delivery, we believe FRE deserves a premium valuation multiple relative to the market. On our revised earnings estimates, it currently trades at a small discount. OUTPERFORM.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY22 EBITA lifted +2%&nbsp;but reversed in FY23
Target price:&nbsp;Lowered to NZ$13.30 from NZ$13.75 to reflect a higher WACC estimate given the increase in the risk free rate



Revenue jump


FRE's&nbsp;very strong second quarter recovery after the COVID-19&nbsp;lockdowns&nbsp;in 1Q21&nbsp;was driven by strong revenue growth (partly pent-up demand), with robust parcel volumes, pricing initiatives, medical waste gains, and digitisation growth. Group growth was held back by subdued storage activity levels, the cycling of trans-Tasman aviation income in the prior year and below-normal business to business (B2B) volumes across the group.&nbsp;


Margin development more subdued


Margin development, particularly in parcels, was held back by adverse mix (business to consumer [B2C] parcels still offer lower margins than B2B), additional parcel capacity at short notice to meet demand, and elevated labour cost inflation. Cost pressures are unlikely to subside in 2H22, though pricing initiatives (management alluded to a parcel general rate increase of at least 6%) due in mid-2022 will assist margins in FY23.&nbsp;


Quality attributes becoming increasingly evident&nbsp;


Management's strategic toolkit is growing. Over the past few years it has reinvested in people (owner-driver earnings up a further +8% in the period), created a profitable B2C parcel business, expanded and will continue to expand its waste renewal operations into new waste/product categories, added value through M&amp;A, and maintained service performance leading to market share gains.&nbsp;


Freightways: 1H22 — Tracking a Better Delivery

Freightways Ltd

Freightways: 1H22 — Tracking a Better Delivery