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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Mainfreight&nbsp;</h2>
1H20 Prev<a target="_blank"></a>iew — Mixed Expectations
Mainfreight (MFT) will report robust earnings growth in its 1H20 result on 13 November 2019, in our view, but a step down from the strong organic rates experienced in recent periods. We forecast underlying NPAT growth of ~+11% against the prior year driven by +7% revenue growth. Margin expansion will likely remain a feature in the US and Europe but less so in Australasia given more subdued volume growth. MFT is trading at ~25x one year forward PE; a small premium to the market. While we recognise MFT’s superior growth outlook, we are wary of consensus downside risk given the softer trading backdrop. NEUTRAL.
Key things to look for in the 1H20 result
<ul>
<li>Revenue momentum: We expect constant currency revenue growth to slow to +6% in 1H20 from +11% in FY19. Lower growth reflects slowing cyclical conditions in all regions. New customer wins and cross-selling will continue to feature strongly, and will likely more than offset the impact of the less supportive macro environment.</li>
<li>Australian performance: Management acknowledged at its July 2019 annual meeting that Australian activity had slowed materially. Domestic transport operations had been hardest hit.</li>
<li>Cross-selling advances: In FY19 ~73% of MFT’s top 500 customers used two or more of its services. We expect this to increase through FY20 given management’s heavy focus on selling to existing customers.&nbsp;</li>
<li>Capex: MFT lowered its capex guidance at its annual meeting to NZ$90m in FY20 (vs. NZ$213m at the time of the FY19 result). However, it is guiding to NZ$430m over the next two years; therefore, ~NZ$340m in FY21.</li>
</ul>
Figure 1. Earnings forecasts (NZ$m)
<table class="table table-striped">
<thead>
<tr>
<td style="width: 90.8pt;">
&nbsp;
</td>
<td style="width: 53.8pt;">
1H19
</td>
<td style="width: 51.8pt;">
1H20E
</td>
<td style="width: 51.8pt;">
Change
</td>
</tr>
</thead>
<tbody>
<tr>
<td style="width: 90.8pt;">
Sales revenue
</td>
<td style="width: 53.8pt;">
1,431.0
</td>
<td style="width: 51.8pt;">
1,530.9
</td>
<td style="width: 51.8pt;">
7.0%
</td>
</tr>
<tr>
<td style="width: 90.8pt;">
EBITDA
</td>
<td style="width: 53.8pt;">
108.3
</td>
<td style="width: 51.8pt;">
118.2
</td>
<td style="width: 51.8pt;">
9.1%
</td>
</tr>
<tr>
<td style="width: 90.8pt;">
Net interest
</td>
<td style="width: 53.8pt;">
(4.0)
</td>
<td style="width: 51.8pt;">
(3.6)
</td>
<td style="width: 51.8pt;">
-9.2%
</td>
</tr>
<tr>
<td style="width: 90.8pt;">
Taxation
</td>
<td style="width: 53.8pt;">
(22.3)
</td>
<td style="width: 51.8pt;">
(24.7)
</td>
<td style="width: 51.8pt;">
10.7%
</td>
</tr>
<tr>
<td style="width: 90.8pt;">
Reported NPAT
</td>
<td style="width: 53.8pt;">
55.7
</td>
<td style="width: 51.8pt;">
61.9
</td>
<td style="width: 51.8pt;">
11.2%
</td>
</tr>
<tr>
<td style="width: 90.8pt;">
Underlying NPAT
</td>
<td style="width: 53.8pt;">
55.9
</td>
<td style="width: 51.8pt;">
61.9
</td>
<td style="width: 51.8pt;">
10.8%
</td>
</tr>
<tr>
<td style="width: 90.8pt;">
Underlying EPS (cents)
</td>
<td style="width: 53.8pt;">
55.5
</td>
<td style="width: 51.8pt;">
61.5
</td>
<td style="width: 51.8pt;">
10.8%
</td>
</tr>
<tr>
<td style="width: 90.8pt;">
Interim DPS (cents)
</td>
<td style="width: 53.8pt;">
22.0
</td>
<td style="width: 51.8pt;">
24.5
</td>
<td style="width: 51.8pt;">
11.4%
</td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis
<div class="content-highlight">
Investment View
MFT is a global supply chain logistics provider with a difference. Its cultural identity, quality focus and dual obsessions of growth and network intensity have allowed it to successfully export its approach to Australia, the US, Asia and Europe. We like its key longer term attributes: (1) it has a high marginal return on capital; (2) well above average earnings growth, albeit lumpy at times; (3) it has proven to be adept to changes in market conditions; and (4) it has substantial global growth prospects. However, these positives are factored into its current share price. NEUTRAL.&nbsp;
</div>
<a target="_blank"></a><a target="_blank">Andy Bowley</a>
<a target="_blank">andy.bowley@forsythbarr.co.nz</a>
<a target="_blank">+64 4 495 8246</a>

Mainfreight&nbsp;
1H20 Preview — Mixed Expectations
Mainfreight (MFT) will report robust earnings growth in its 1H20 result on 13 November 2019, in our view, but a step down from the strong organic rates experienced in recent periods. We forecast underlying NPAT growth of ~+11% against the prior year driven by +7% revenue growth. Margin expansion will likely remain a feature in the US and Europe but less so in Australasia given more subdued volume growth. MFT is trading at ~25x one year forward PE; a small premium to the market. While we recognise MFT’s superior growth outlook, we are wary of consensus downside risk given the softer trading backdrop. NEUTRAL.
Key things to look for in the 1H20 result

Revenue momentum: We expect constant currency revenue growth to slow to +6% in 1H20 from +11% in FY19. Lower growth reflects slowing cyclical conditions in all regions. New customer wins and cross-selling will continue to feature strongly, and will likely more than offset the impact of the less supportive macro environment.
Australian performance: Management acknowledged at its July 2019 annual meeting that Australian activity had slowed materially. Domestic transport operations had been hardest hit.
Cross-selling advances: In FY19 ~73% of MFT’s top 500 customers used two or more of its services. We expect this to increase through FY20 given management’s heavy focus on selling to existing customers.&nbsp;
Capex: MFT lowered its capex guidance at its annual meeting to NZ$90m in FY20 (vs. NZ$213m at the time of the FY19 result). However, it is guiding to NZ$430m over the next two years; therefore, ~NZ$340m in FY21.

Figure 1. Earnings forecasts (NZ$m)




&nbsp;


1H19


1H20E


Change






Sales revenue


1,431.0


1,530.9


7.0%




EBITDA


108.3


118.2


9.1%




Net interest


(4.0)


(3.6)


-9.2%




Taxation


(22.3)


(24.7)


10.7%




Reported NPAT


55.7


61.9


11.2%




Underlying NPAT


55.9


61.9


10.8%




Underlying EPS (cents)


55.5


61.5


10.8%




Interim DPS (cents)


22.0


24.5


11.4%




Source: Forsyth Barr analysis

Investment View
MFT is a global supply chain logistics provider with a difference. Its cultural identity, quality focus and dual obsessions of growth and network intensity have allowed it to successfully export its approach to Australia, the US, Asia and Europe. We like its key longer term attributes: (1) it has a high marginal return on capital; (2) well above average earnings growth, albeit lumpy at times; (3) it has proven to be adept to changes in market conditions; and (4) it has substantial global growth prospects. However, these positives are factored into its current share price. NEUTRAL.&nbsp;

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

Mainfreight: 1H20 Preview — Mixed Expectations

Mainfreight Ltd

Mainfreight: 1H20 Preview — Mixed Expectations