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>
Ready, Fire, Aim; Upgrade to OUTPERFORM
OUTPERFORM
We upgrade Mainfreight (MFT) to OUTPERFORM from NEUTRAL given the opportunity to access a high quality New Zealand growth story with significant long term opportunities across its global platform, at a reasonable price. We acknowledge that MFT is exposed to cyclical risks, but these are often overstated by investors. The GFC showed that MFT (1) is adversely impacted by recessionary conditions, but not overly so given its focus on 'every day freight', and (2) that it can recover strongly. There is little balance sheet risk and uncommitted capex has been deferred. It is by no means cheap (it trades on a FY22 PE multiple of ~21x) and we acknowledge that the environment ahead is very uncertain and the range of potential near term outcomes is wide. However, its trading update covering the lead up to FY20 year end and the first week of April was surprisingly good. While one week of data can't be extrapolated, the impact of activity restrictions from lock-down and social distancing measures across MFT's markets, has had a mixed yet only modest impact on group revenues and has been helped by the weaker NZD. Near term challenges aside, MFT's competitive approach means share gains and cross-selling will remain key drivers.&nbsp;
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/127/233/original/image_49665614421586393086352.png?1586393090" class="editor-image img-responsive" data-smartkarma-image-id="127233"></figure>
Uncertain outlook
The wide range of revenue outcomes for MFT regionally (NZ -40% year-on-year, Australia +9%, US and Europe both -8%, and Asia flat) during the first week of April against the prior year highlight the difficulty in having any degree of confidence in forecasting the remaining 51 weeks of FY21. Nonetheless, we assume that group revenue will decline by -4% over the year in NZD terms (-6% in constant currency terms). MFT will be at least partially able to offset the cyclical challenges with new customer wins and further cross-selling. The distressed nature of some competitors will provide opportunities, in our opinion.&nbsp;
Operating&nbsp;deleverage&nbsp;and margin mix&nbsp;
MFT's&nbsp;cost base has a material degree of flex given the highly variable nature of its transport operations (both in-house, contractors and external third parties). We estimate around two thirds&nbsp;of its PBT (profit before tax) cost base is variable. In addition, we expect the company to&nbsp;variablise&nbsp;some fixed costs that will mitigate the pressure on earnings from lower revenues.&nbsp;
GFC&nbsp;illustration shows shallow trough and rapid recovery
MFT navigated the global financial crisis extremely well. The trough in profitability differed by market (between 2H09 and 1H10) but the overall recovery was rapid. FY11 earnings were above all prior years. MFT's ability to pick-up new customers to offset cyclical pressures, and variablise fixed costs, helped counter the earnings impact. Since the GFC, it has also increased its exposure to more defensive 'every day freight' sectors with a particular emphasis on food and beverages, and DIY.&nbsp;&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Mainfreight
Ready, Fire, Aim; Upgrade to OUTPERFORM
OUTPERFORM
We upgrade Mainfreight (MFT) to OUTPERFORM from NEUTRAL given the opportunity to access a high quality New Zealand growth story with significant long term opportunities across its global platform, at a reasonable price. We acknowledge that MFT is exposed to cyclical risks, but these are often overstated by investors. The GFC showed that MFT (1) is adversely impacted by recessionary conditions, but not overly so given its focus on 'every day freight', and (2) that it can recover strongly. There is little balance sheet risk and uncommitted capex has been deferred. It is by no means cheap (it trades on a FY22 PE multiple of ~21x) and we acknowledge that the environment ahead is very uncertain and the range of potential near term outcomes is wide. However, its trading update covering the lead up to FY20 year end and the first week of April was surprisingly good. While one week of data can't be extrapolated, the impact of activity restrictions from lock-down and social distancing measures across MFT's markets, has had a mixed yet only modest impact on group revenues and has been helped by the weaker NZD. Near term challenges aside, MFT's competitive approach means share gains and cross-selling will remain key drivers.&nbsp;

Uncertain outlook
The wide range of revenue outcomes for MFT regionally (NZ -40% year-on-year, Australia +9%, US and Europe both -8%, and Asia flat) during the first week of April against the prior year highlight the difficulty in having any degree of confidence in forecasting the remaining 51 weeks of FY21. Nonetheless, we assume that group revenue will decline by -4% over the year in NZD terms (-6% in constant currency terms). MFT will be at least partially able to offset the cyclical challenges with new customer wins and further cross-selling. The distressed nature of some competitors will provide opportunities, in our opinion.&nbsp;
Operating&nbsp;deleverage&nbsp;and margin mix&nbsp;
MFT's&nbsp;cost base has a material degree of flex given the highly variable nature of its transport operations (both in-house, contractors and external third parties). We estimate around two thirds&nbsp;of its PBT (profit before tax) cost base is variable. In addition, we expect the company to&nbsp;variablise&nbsp;some fixed costs that will mitigate the pressure on earnings from lower revenues.&nbsp;
GFC&nbsp;illustration shows shallow trough and rapid recovery
MFT navigated the global financial crisis extremely well. The trough in profitability differed by market (between 2H09 and 1H10) but the overall recovery was rapid. FY11 earnings were above all prior years. MFT's ability to pick-up new customers to offset cyclical pressures, and variablise fixed costs, helped counter the earnings impact. Since the GFC, it has also increased its exposure to more defensive 'every day freight' sectors with a particular emphasis on food and beverages, and DIY.&nbsp;&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Mainfreight: Ready, Fire, Aim; Upgrade to OUTPERFORM

Mainfreight Ltd

Mainfreight: Ready, Fire, Aim; Upgrade to OUTPERFORM