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>Mainfreight</h2>
Q4 Peer Read-through — Margins Robust Despite Revenue Decline
NEUTRAL&nbsp;
Fourth quarter earnings results from&nbsp;Mainfreight's&nbsp;(MFT) key global listed peers highlight reduced industry activity, with revenue declines being reported for the third consecutive quarter, however, margins across all segments remain robust.&nbsp;MFT&nbsp;is currently trading at a one year forward PE of ~21x, towards the top of the range of its listed global peers. In light of growing cyclical/industry headwinds from the coronavirus outbreak, we see near term earnings risk being weighted to the downside. NEUTRAL.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">MFT</td>
<td style="width: 48pt;">Financials:Mar/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$36.75</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">141.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">157.8</td>
<td style="text-align: left; width: 43.2pt;">173.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">191.9&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">15.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">13.6</td>
<td style="text-align: left; width: 48pt;">12.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">11.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$39.00</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">140.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">156.7&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">172.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">190.6&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">18.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">17.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">15.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Medium</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">25.7</td>
<td style="text-align: left; width: 42.6pt;">11.8</td>
<td style="text-align: left; width: 43.2pt;">10.1</td>
<td style="text-align: left; width: 48pt;">10.5&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">26.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">23.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">21.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">19.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">100.7m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">56.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">62.7&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">69.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">76.2&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">6.5</td>
<td style="text-align: left; width: 42.6pt;">6.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.3</td>
<td style="text-align: left; width: 42.6pt;">4.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$3,701m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">1.5</td>
<td style="text-align: left; width: 42.6pt;">1.7</td>
<td style="text-align: left; width: 48pt;">1.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">59.8k (NZ$2,360k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">2.1</td>
<td style="text-align: left; width: 42.6pt;">2.4</td>
<td style="text-align: left; width: 48pt;">2.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.9&nbsp;</td>
</tr>
</tbody>
</table>
Global peer 4Q19 highlights:
<ul type="disc">
<li>Revenue growth:&nbsp;MFT's&nbsp;global listed peers reported average revenue growth of -3%, a further deterioration from recent quarters, however, both less-than-truckload (LTL) and logistics (warehousing) segments experienced growth.</li>
<li>EBITDA growth: Margins remain strong across the sector, with EBITDA growth of +3% against the prior year, although we recognise the impact of&nbsp;IFRS&nbsp;16 (lease accounting) will be artificially inflating this number, particularly in the logistics segment.</li>
</ul>
Industry revenue growth decline continues
The freight industry has been slowing consistently since 3Q18, following strong growth experienced from 3Q16 to 2Q18. For the third consecutive quarter industry revenue growth has been negative, with&nbsp;MFT's&nbsp;key peers reporting revenue growth of -3% for 4Q19. Revenue declined in both the air and sea freight segments, whilst revenue in the&nbsp;LTL&nbsp;and logistics segments&nbsp;grew +4% and +5% respectively against 4Q18.
Margins remain robust
Despite the slower industry backdrop, margins continue to be strong through the fourth quarter, with&nbsp;LTL&nbsp;margins remaining the most attractive. Air and sea freight margins are down slightly from the record third quarter but remain in line with historic levels. The logistics segment margins continue to grow;&nbsp;however, it is worth noting that the logistics segment is disproportionately affected by the adoption of&nbsp;IFRS&nbsp;16 given the relatively higher level of leases, and this is inflating reported margins.
Implications for MFT
Despite&nbsp;MFT&nbsp;having slightly different geographic and business mix exposures to many of its key global peers, it remains reliant on many of the same cyclical influences, therefore, the financial performance of its peers provides a useful indication of the broader industry backdrop for&nbsp;MFT. The analysis of&nbsp;MFT's&nbsp;global peers would suggest that&nbsp;MFT&nbsp;will have a soft revenue result in 2H20, compensated by robust margins (similar to the 1H20&nbsp;oucome)&nbsp;when it reports on 27 May 2020. Near term earnings risk is&nbsp;weighted to the downside, in our opinion.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Mainfreight
Q4 Peer Read-through — Margins Robust Despite Revenue Decline
NEUTRAL&nbsp;
Fourth quarter earnings results from&nbsp;Mainfreight's&nbsp;(MFT) key global listed peers highlight reduced industry activity, with revenue declines being reported for the third consecutive quarter, however, margins across all segments remain robust.&nbsp;MFT&nbsp;is currently trading at a one year forward PE of ~21x, towards the top of the range of its listed global peers. In light of growing cyclical/industry headwinds from the coronavirus outbreak, we see near term earnings risk being weighted to the downside. NEUTRAL.
         


NZX Code
MFT
Financials:Mar/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$36.75
NPAT* (NZ$m)
141.1&nbsp;
157.8
173.7&nbsp;
191.9&nbsp;
EV/EBITDA
15.0&nbsp;
13.6
12.5&nbsp;
11.4&nbsp;


Target price
NZ$39.00
EPS* (NZc)
140.1&nbsp;
156.7&nbsp;
172.5&nbsp;
190.6&nbsp;
EV/EBIT
18.9&nbsp;
17.0&nbsp;
15.5&nbsp;
14.1&nbsp;


Risk rating
Medium
EPS growth* (%)
25.7
11.8
10.1
10.5&nbsp;
PE
26.2&nbsp;
23.5&nbsp;
21.3&nbsp;
19.3&nbsp;


Issued shares
100.7m
DPS (NZc)
56.0&nbsp;
62.7&nbsp;
69.0&nbsp;
76.2&nbsp;
Price/NTA
6.5
6.0&nbsp;
5.3
4.6&nbsp;


Market cap
NZ$3,701m
Imputation (%)
100
100
100
100
Cash div yld (%)
1.5
1.7
1.9&nbsp;
2.1&nbsp;


Avg daily turnover
59.8k (NZ$2,360k)
*Based on normalised profits


Gross div yld (%)
2.1
2.4
2.6&nbsp;
2.9&nbsp;



Global peer 4Q19 highlights:

Revenue growth:&nbsp;MFT's&nbsp;global listed peers reported average revenue growth of -3%, a further deterioration from recent quarters, however, both less-than-truckload (LTL) and logistics (warehousing) segments experienced growth.
EBITDA growth: Margins remain strong across the sector, with EBITDA growth of +3% against the prior year, although we recognise the impact of&nbsp;IFRS&nbsp;16 (lease accounting) will be artificially inflating this number, particularly in the logistics segment.

Industry revenue growth decline continues
The freight industry has been slowing consistently since 3Q18, following strong growth experienced from 3Q16 to 2Q18. For the third consecutive quarter industry revenue growth has been negative, with&nbsp;MFT's&nbsp;key peers reporting revenue growth of -3% for 4Q19. Revenue declined in both the air and sea freight segments, whilst revenue in the&nbsp;LTL&nbsp;and logistics segments&nbsp;grew +4% and +5% respectively against 4Q18.
Margins remain robust
Despite the slower industry backdrop, margins continue to be strong through the fourth quarter, with&nbsp;LTL&nbsp;margins remaining the most attractive. Air and sea freight margins are down slightly from the record third quarter but remain in line with historic levels. The logistics segment margins continue to grow;&nbsp;however, it is worth noting that the logistics segment is disproportionately affected by the adoption of&nbsp;IFRS&nbsp;16 given the relatively higher level of leases, and this is inflating reported margins.
Implications for MFT
Despite&nbsp;MFT&nbsp;having slightly different geographic and business mix exposures to many of its key global peers, it remains reliant on many of the same cyclical influences, therefore, the financial performance of its peers provides a useful indication of the broader industry backdrop for&nbsp;MFT. The analysis of&nbsp;MFT's&nbsp;global peers would suggest that&nbsp;MFT&nbsp;will have a soft revenue result in 2H20, compensated by robust margins (similar to the 1H20&nbsp;oucome)&nbsp;when it reports on 27 May 2020. Near term earnings risk is&nbsp;weighted to the downside, in our opinion.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Mainfreight: Q4 Peer Read-Through — Margins Robust Despite Revenue Decline

Mainfreight Ltd

Mainfreight: Q4 Peer Read-Through — Margins Robust Despite Revenue Decline