WEEKLY STOCK COMMENT: MAINFREIGHT
Roy Davidson, 17 May 2018
Mainfreight (MFT) is a global supply chain logistics provider with operations in New Zealand, Australia, Asia, US and Europe. MFT’s origins were primarily in the less than a container load freight forwarding industry, but it now provides customers with a full range of logistic services including managed warehousing, domestic distribution, metro and wharf cartage and international air and sea freight.
Over recent years, an increasing portion of MFT’s revenues and earnings have been derived from outside New Zealand, with MFT now also having operations in Australia, the Americas, Europe and Asia. New Zealand now only accounts for 25% of revenues, but is still MFT’s most profitable network, comprising over 40% of earnings. This global network enables MFT to offer a broader range of logistics services, allowing the company to compete for large multi-national contracts. Recent results have shown that MFT’s Air & Ocean businesses are growing very strongly, and as network intensity increases, so too will profitability. The geographic spread has also diversified the revenue base, lowered the reliance on the domestic economy and therefore reduced MFT’s risk profile.
MFT is well leveraged to capitalise on some strong underlying global drivers within the sector. Globalisation has extended the geographic scope of product markets, ultimately increasing transportation requirements. E-Commerce, enterprise resource planning and just-in-time production have also increased the demand for reliable warehousing, supply chain management, and less than a container load delivery. A large portion of the demand for logistic services is driven by the increasing tendency of shipping lines to outsource their logistic activities to specialists that offer greater expertise in managing global supply chains.
MFT posted a reasonable 1H18 result with earnings +3% to $88.8m. While this was softer than expectations, management pointed to a number of earnings impacts which will reduce in the 2H and support an improved full year performance. Importantly, top-line momentum remains solid with all regions (ex. Americas) posting double-digit growth. Asia and Americas disappointed again, however, the strong Australasia performance appears to be making up for a lack of progress further abroad (for now).
MFT has a proven track record and a strong market position in Australasia where the bulk of earnings are derived. MFT’s growing global footprint has provided network benefits to New Zealand and Australia, and is beginning to contribute strongly in its own right, setting the company up well for future growth. A core portfolio holding, the company has excellent growth potential, benefits from any weakness in the New Zealand dollar, has a well-covered dividend, and has one of the best management teams and company cultures in New Zealand.
Potential risks for MFT include 1) increased competition, 2) economic downturn, and 3) lower global trade levels.