WEEKLY STOCK COMMENT: FREIGHTWAYS
Peter Ball, 15 March 2018
FRE operates in the express package, business mail and information management markets. The group’s origins date back to 1964 through New Zealand Couriers – a pioneer in the express package industry in New Zealand. FRE has grown organically and by acquisition to become a leading New Zealand service provider, with representation in every major town and city throughout the country.
The express package and business mail division (approximately 70% of earnings) operates a multi-brand strategy in the domestic market through New Zealand Couriers, Post Haste and others. The information management division (approximately 30% of earnings) is established in New Zealand through brands such as of Online Security Services and Archive Security, and in Australia through brands such as Archive Security and DataBank.
Transport activity is closely linked to the economic cycle, albeit more cyclical. FRE’s express package business experienced significant volume and price pressure through 2009 due to the global financial crisis, however, this turned around in 2010. Since then, volumes have continued to recover slowly and the pricing environment has stabilised, underpinning the company’s earnings recovery. Information management’s more defensive recurring revenue streams cushion the group’s earnings from the inherent cyclicality of the express package business.
FRE’s express package business has recently experienced strong organic revenue growth, driving good results. However, some margin pressure (e.g. higher labour and administration costs driven by greater than expected peak-season sorting needs, IT investment and the Kaikoura earthquake) have muted the benefits somewhat. The Information Management business has been solid with both organic growth and acquisitions. The company expects underlying earnings growth to continue, reflecting confidence in the business.
FRE is a well managed company with a quality franchise that is difficult for a competitor to replicate. FRE’s service is embedded in the supply chain of its customers and this has enabled it to develop strong customer relationships and brand loyalty. The industry structure is relatively stable. FRE’s largest competitor is owned by NZ Post; in aggregate the two largest players have around 80% market share. While FRE is exposed the domestic economic cycle, we note that growth should be supported by the longer term structural increase in e-commerce. As online shopping grows, so will the volumes of packages needing to be shipped – this should be supportive for FRE given the NZ market structure, assuming ongoing rational behavior from its key competitor.
Risks to FRE include; 1) economic downturn, 2) increased competition, and 3) acquisition risk.