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

Freightways FY20&nbsp;— Pricing for Effort Lifts Target&nbsp;

OUTPERFORM
We upgrade Freightways (FRE) to OUTPERFORM; the company has started FY21 on an above trend growth trajectory, which is supportive to earnings upgrades and a valuation re-rating. FRE is considered a GDP proxy stock, yet we believe has the potential to outgrow economic activity via strategic growth. Trading at a relatively attractive ~18x one year forward PE, ​​​​FRE offers value for risk in an otherwise expensive market. The FY20 result is messy and difficult to analyse given the impact of (1) COVID-19, (2) first year of IFRS-16 (accounting for leases), and (3) the acquisition in April 2020 of Big Chill. However, cashflow was robust and improved management disclosure offers insight into the forward looking opportunity, particularly in the Express Package operations that are winning share and now generating better margins in the business-to-consumer (B2C) channel.


What's&nbsp;changed?&nbsp;



Earnings:&nbsp;FY21&nbsp;NPAT lifted by +6%, FY22&nbsp;+3%
Target price:&nbsp;Raised to NZ$8.20 to reflect revised cost of capital assumptions and earnings upgrades



Express Package accelerating into FY21


FRE&nbsp;has enjoyed an impressive start to FY21 with year-to-date volume growth of +11% in its network courier operations. This&nbsp;reflects&nbsp;a&nbsp;combination of new and existing business, with both B2B (business-to-business) and B2C (business-to-consumer) contributing. With B2C's share of total volume&nbsp;growing to ~24% from ~20% in 1H20, we deduce that B2C is currently growing ~+30% against the prior year, implying&nbsp;solid market share gains on better margins (given 'pricing for effort' gains and better productivity).&nbsp;


Information Management&nbsp;key area of uncertainty


The impact of COVID-19 will likely be more enduring on Information Management given many of its activity based services benefit from office occupancy.&nbsp;FRE&nbsp;implemented a number of initiatives mid-year to counter the deterioration in profitability prior to COVID-19 and should be more adaptable to volume changes via cost base adjustments to protect margins through FY21. Once normal activity levels resume the division&nbsp;has scope for a step recovery in profitability.&nbsp;&nbsp;


Moral compass in favour of dividend&nbsp;


FRE's decision to not pay a final dividend is both prudent and sensible, in our opinion. It avoids the potential social consequences/fall-out of qualifying for, and claiming, wage subsidies, despite little (redundancy) threat to the workforce, and then paying shareholders a dividend out of subsidy supported earnings. We expect FRE to resume dividend payments in FY21 at an attractive, in light of its growth profile, ~6% gross yield.&nbsp;&nbsp;



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Freightways: FY20 — Pricing for Effort Lifts Target

Freightways Ltd

Freightways: FY20 — Pricing for Effort Lifts Target