INSIGHTS

WEEKLY COMPANY INSIGHT: FREIGHTWAYS

Roy Davidson, 2 May 2019

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Description

Freightways (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.

FRE operates in Express Packages and Information Management

The express package and business mail division (approximately 75% of earnings) operates a multi-brand strategy in the domestic market through New Zealand Couriers, Post Haste and others. The information management division (approximately 25% of earnings) is well established in both New Zealand and Australia, operating in a number of segments including document storage, secure destruction, medical waste, and document digitisation.

FRE’s performance partly linked to the economic cycle

Transport activity is closely linked to the economic cycle, albeit a little more cyclical. FRE holds around 40% market share of the New Zealand parcel market. With the proliferation of online sales (accounting for around 10% of retail sales at present), parcel volumes are likely to continue to grow. While the company is exposed to the performance of the domestic economy, it is a quality name with a structural tailwind from e-commerce which is likely to help offset some of the impact of slower economic growth.

Results remain solid

FRE’s express package business continues to perform well with solid volume growth helping to drive increases in revenue. However, some margin pressure (e.g. higher labour and administration costs driven by greater than expected peak-season sorting needs, IT investment and changes in its product mix) have restrained any operating leverage. The Information Management business has been solid with both organic growth and continued investment in bolt-on acquisitions. The company expects underlying earnings growth to continue, reflecting confidence in the business, albeit at a slower pace than recent history.

Outlook

FRE is a well-managed company with a quality franchise that is difficult for a competitor to easily 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 NZ Post; in aggregate the two largest players have around 80% market share. While FRE is exposed to 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 behaviour from its key competitor.

Risks

  1. economic downturn
  2. acquisition risk
  3. increased competition
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