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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Freightways<br>Owner-Driver Model Under the Spotlight</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>The courier industry's owner-driver model is under threat from legal challenges and potential legislation; while the risk to&nbsp;Freightways' (FRE) can't be ignored, we recognise it operates an industry best-in-class contracting model and is in a strong relative competitive position. It is&nbsp;a successful proponent of 'independent contractors' with key advantages including enhanced productivity, less capital employed, and lower vehicle running costs than applying an employee model. The threat reflects a minority of independent contractors across different industries that are vulnerable and not afforded any protections under employment law. The&nbsp;low margin and competitive&nbsp;nature of the wider courier industry means some contracted owner-drivers may be wrongly classified as contractors, as the Employment Court ruled last year in the&nbsp;Leota&nbsp;case. We expect the government to legislate in its&nbsp;current term to provide better protections for vulnerable contractors. However, we don't expect potential new legislation to have a materially detrimental impact on FRE.</p>
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<h3>Industry practice under scrutiny</h3>
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<p>Last month the Labour Inspectorate said it was conducting a campaign to understand how widespread driver exploitation was in the courier industry. We expect this stems from the current government's tripartite working group&nbsp;(MBIE [under which the Labour Inspectorate falls], Business NZ and&nbsp; Council of Trade Unions) which is considering better protections for vulnerable contractors.&nbsp;The&nbsp;Leota&nbsp;case last year highlighted the vulnerabilities of courier contractors, particularly in dependant relationships. The judgement&nbsp;was clear that Mr&nbsp;Leota&nbsp;was an employee of&nbsp;Parcel Express Ltd, not a contractor as his 'contract for services' suggested. Last week&nbsp;NZ Post settled a case out of court brought by one of its drivers with support from E tū (union). These legal challenges&nbsp;do not set a precedent for the industry, but provide further signalling to the government that new rules may be necessary.</p>
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<h3>Government action possible</h3>
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<p>The government's tripartite working group will make recommendations to&nbsp;cabinet later this year, if&nbsp;and which, protections should be deployed to better protect vulnerable contractors. The solution is not obvious (a&nbsp;key challenge in providing better protections is that there are many different contractual relationships with workers across different firms, and even within the same firm),&nbsp;but given the working group approach to finding solutions, it's likely to be a tempered version of what the key protagonists desire. Industry costs will likely rise, albeit this will impact participants unevenly.&nbsp;&nbsp;</p>
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<h3>FRE in a strong relative position&nbsp;</h3>
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<p>FRE has lifted its driver pay rates significantly in recent years, helped by its Pricing for Effort initiative to lift prices for residential parcels.&nbsp;This has lifted average pay levels for its independent contractors (+8%&nbsp;during FY21; +5% to 10% in FY22E). We understand its minimum net income levels are above the industry average, providing a favourable competitive position should industry costs rise.&nbsp;</p>
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Freightways Owner-Driver Model Under the Spotlight

OUTPERFORM
The courier industry's owner-driver model is under threat from legal challenges and potential legislation; while the risk to&nbsp;Freightways' (FRE) can't be ignored, we recognise it operates an industry best-in-class contracting model and is in a strong relative competitive position. It is&nbsp;a successful proponent of 'independent contractors' with key advantages including enhanced productivity, less capital employed, and lower vehicle running costs than applying an employee model. The threat reflects a minority of independent contractors across different industries that are vulnerable and not afforded any protections under employment law. The&nbsp;low margin and competitive&nbsp;nature of the wider courier industry means some contracted owner-drivers may be wrongly classified as contractors, as the Employment Court ruled last year in the&nbsp;Leota&nbsp;case. We expect the government to legislate in its&nbsp;current term to provide better protections for vulnerable contractors. However, we don't expect potential new legislation to have a materially detrimental impact on FRE.


Industry practice under scrutiny


Last month the Labour Inspectorate said it was conducting a campaign to understand how widespread driver exploitation was in the courier industry. We expect this stems from the current government's tripartite working group&nbsp;(MBIE [under which the Labour Inspectorate falls], Business NZ and&nbsp; Council of Trade Unions) which is considering better protections for vulnerable contractors.&nbsp;The&nbsp;Leota&nbsp;case last year highlighted the vulnerabilities of courier contractors, particularly in dependant relationships. The judgement&nbsp;was clear that Mr&nbsp;Leota&nbsp;was an employee of&nbsp;Parcel Express Ltd, not a contractor as his 'contract for services' suggested. Last week&nbsp;NZ Post settled a case out of court brought by one of its drivers with support from E tū (union). These legal challenges&nbsp;do not set a precedent for the industry, but provide further signalling to the government that new rules may be necessary.


Government action possible


The government's tripartite working group will make recommendations to&nbsp;cabinet later this year, if&nbsp;and which, protections should be deployed to better protect vulnerable contractors. The solution is not obvious (a&nbsp;key challenge in providing better protections is that there are many different contractual relationships with workers across different firms, and even within the same firm),&nbsp;but given the working group approach to finding solutions, it's likely to be a tempered version of what the key protagonists desire. Industry costs will likely rise, albeit this will impact participants unevenly.&nbsp;&nbsp;


FRE in a strong relative position&nbsp;


FRE has lifted its driver pay rates significantly in recent years, helped by its Pricing for Effort initiative to lift prices for residential parcels.&nbsp;This has lifted average pay levels for its independent contractors (+8%&nbsp;during FY21; +5% to 10% in FY22E). We understand its minimum net income levels are above the industry average, providing a favourable competitive position should industry costs rise.&nbsp;


Freightways: Owner-Driver Model Under the Spotlight

Freightways Ltd

Freightways: Owner-Driver Model Under the Spotlight