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>Posting a Better Margin Outlook</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Freightways&nbsp;(FRE) has a key opportunity to lift profitability in its core parcels operations in light of a more rational competitive backdrop, in our opinion. Its biggest competitor, NZ Post, has shifted its mindset&nbsp;from the public good to a commercially&nbsp;focussed&nbsp;business. NZ Post's latest annual report (for its 2020 financial year) provides several key statements that support a strategic desire to lift profitability significantly from current levels. This strongly suggests a continuation of the current positive pricing environment and supports an expanding industry profit pool. We believe this will allow&nbsp;FRE's&nbsp;'pricing for effort' strategy to make further pricing gains in the lower margin but higher growth, business-to-consumer (B2C) channel, which is consistent with the assumptions behind our current above market consensus earnings forecasts. Consequently, FRE earnings outlook remains strong and with it trading at an undemanding one year forward PE of ~19x, we reiterate&nbsp;an OUTPERFORM rating.&nbsp;</p>
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<h3>Material issues&nbsp;</h3>
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<p>Each year NZ Post publishes a list of the most important issues that "could significantly impact [its] business performance". The most important issue this year, determined by its internal and external engagement process, is "commercial mindset", reflecting the need to improve profitability, use of resources and prioritisation of opportunities. This is further acknowledgement that improving its return on capital is more a necessity rather than aspiration. The company's evolution to a more commercially focussed organisation has been in place for several years under current management as evidenced by consistent above trend pricing initiatives.</p>
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<h3>Financial targets for parcels</h3>
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<p>NZ Post has indicated&nbsp;aggressive parcel profitability goals for the next few years. It is targeting a "return on parcel revenue" or EBIT margin improvement from 2.5% in FY21 to&nbsp;9.3% in FY23. Assuming ongoing volume growth, this equates to &gt;NZ$50m additional EBIT to the parcel industry profit pool, which has historically been dominated by&nbsp;FRE's&nbsp;high margin B2B (business-to-business)&nbsp;focussed&nbsp;operations. Notwithstanding scope for operating leverage benefits to accrue from volume growth, we anticipate further above trend pricing action will be necessary to meet these targets.&nbsp;</p>
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<h3>Parcel quality impacted by COVID-19</h3>
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<p>NZ Post was put under considerable strain as ecommerce activity boomed on the transition from Alert Level 4 to 3. It was unable to manage the significant increase in parcel demand, materially in excess of its previous activity peak (for which it would typically plan months in advance for), and delivery quality suffered. The proportion of parcels delivered on time fell to ~91% in FY20 from 96% in FY19, with the decline likely concentrated in the fourth quarter. We expect its quality to improve through FY21.&nbsp;</p>
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<div><strong>Andy Bowley</strong></div>
<div><a href="mailto:andy.bowley@forsythbarr.co.nz" target="_blank" rel="noopener">andy.bowley@forsythbarr.co.nz</a></div>
<div>+64 4 495 8246</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Freightways Posting a Better Margin Outlook

OUTPERFORM
Freightways&nbsp;(FRE) has a key opportunity to lift profitability in its core parcels operations in light of a more rational competitive backdrop, in our opinion. Its biggest competitor, NZ Post, has shifted its mindset&nbsp;from the public good to a commercially&nbsp;focussed&nbsp;business. NZ Post's latest annual report (for its 2020 financial year) provides several key statements that support a strategic desire to lift profitability significantly from current levels. This strongly suggests a continuation of the current positive pricing environment and supports an expanding industry profit pool. We believe this will allow&nbsp;FRE's&nbsp;'pricing for effort' strategy to make further pricing gains in the lower margin but higher growth, business-to-consumer (B2C) channel, which is consistent with the assumptions behind our current above market consensus earnings forecasts. Consequently, FRE earnings outlook remains strong and with it trading at an undemanding one year forward PE of ~19x, we reiterate&nbsp;an OUTPERFORM rating.&nbsp;


Material issues&nbsp;


Each year NZ Post publishes a list of the most important issues that "could significantly impact [its] business performance". The most important issue this year, determined by its internal and external engagement process, is "commercial mindset", reflecting the need to improve profitability, use of resources and prioritisation of opportunities. This is further acknowledgement that improving its return on capital is more a necessity rather than aspiration. The company's evolution to a more commercially focussed organisation has been in place for several years under current management as evidenced by consistent above trend pricing initiatives.


Financial targets for parcels


NZ Post has indicated&nbsp;aggressive parcel profitability goals for the next few years. It is targeting a "return on parcel revenue" or EBIT margin improvement from 2.5% in FY21 to&nbsp;9.3% in FY23. Assuming ongoing volume growth, this equates to &gt;NZ$50m additional EBIT to the parcel industry profit pool, which has historically been dominated by&nbsp;FRE's&nbsp;high margin B2B (business-to-business)&nbsp;focussed&nbsp;operations. Notwithstanding scope for operating leverage benefits to accrue from volume growth, we anticipate further above trend pricing action will be necessary to meet these targets.&nbsp;


Parcel quality impacted by COVID-19


NZ Post was put under considerable strain as ecommerce activity boomed on the transition from Alert Level 4 to 3. It was unable to manage the significant increase in parcel demand, materially in excess of its previous activity peak (for which it would typically plan months in advance for), and delivery quality suffered. The proportion of parcels delivered on time fell to ~91% in FY20 from 96% in FY19, with the decline likely concentrated in the fourth quarter. We expect its quality to improve through FY21.&nbsp;



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





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



Freightways: Posting a Better Margin Outlook

Freightways Ltd

Freightways: Posting a Better Margin Outlook