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<br>1H22 — Boom! Boom!</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Mainfreight (MFT) reported a stonking 1H22 result, boosted by the freight rate super-cycle and supported by underlying business momentum with impressive volume gains in all regions. Positive earnings momentum continues as we expect significant further increases to consensus expectations. While the freight super-cycle will remain a key driver, MFT is more exposed to 'contract' rather than 'spot' rates, which means the cycle will remain a tailwind as contract rates continue to lag but climb towards spot rates, despite likely spot rate compression. MFT's earnings growth trajectory may flatten over the medium term when rates ultimately normalise as supply chain congestion eventually eases, in the meantime, expect continued strong growth deserving of a PE premium, despite lessening valuation support from global freight peers.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings:</strong>&nbsp; We make further material upgrades to our earnings forecasts in each outlook year</li>
<li><strong>Target price</strong>:&nbsp;Lifted to NZ$98 from NZ$90, as earnings revisions more than offset peer group de-rating&nbsp;</li>
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<h3>Super-cycle benefit; stronger for longer</h3>
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<p>The freight rate super-cycle appears to have peaked. Importantly, MFT is more exposed to contract rates rather than spot rates; contract rates are substantially lower than spot rates but are increasing. While we believe the risk to spot rates is to the downside, the risk to contract rates is upwards. This should allow MFT to continue to leverage the freight super-cycle to a greater extent until contract rates peak. As contract rates lag spot rates&nbsp;this may not be for another 6–9 months. In short, the level of Air &amp; Ocean over-earning could be substantially greater in 2H22 than 1H22.&nbsp;</p>
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<h3>Volume growth pleasing&nbsp;</h3>
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<p>Pleasingly volume momentum continues across all three products: Air &amp; Ocean volumes were up +30%, Transport volumes were up ~+15% in each region (higher in the Americas), and Warehousing inventory was boosted by the customer response to congestion. While some of the volume uplift is not sustainable (i.e. the modal shift from sea to air freight boosted air freight volumes by +40% in 1H22), we believe market share gains are a key driver, suggesting MFT's underlying business momentum remains robust. However, volume growth has created capacity challenges, particularly in&nbsp; Transport, with management stating that its "networks are full".&nbsp;&nbsp;</p>
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<h3>Valuation support has weakened</h3>
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<p>Notwithstanding further material earnings upgrades in this report,&nbsp;we believe there is scope for further upward earnings revisions&nbsp;through 2H22. While&nbsp;MFT's&nbsp;'E' (earnings) is supportive to its 'P' (share price), its 'PE' multiple is less so. Relative valuation support from its key global peers has weakened in recent weeks.&nbsp;</p>
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Mainfreight 1H22 — Boom! Boom!

NEUTRAL
Mainfreight (MFT) reported a stonking 1H22 result, boosted by the freight rate super-cycle and supported by underlying business momentum with impressive volume gains in all regions. Positive earnings momentum continues as we expect significant further increases to consensus expectations. While the freight super-cycle will remain a key driver, MFT is more exposed to 'contract' rather than 'spot' rates, which means the cycle will remain a tailwind as contract rates continue to lag but climb towards spot rates, despite likely spot rate compression. MFT's earnings growth trajectory may flatten over the medium term when rates ultimately normalise as supply chain congestion eventually eases, in the meantime, expect continued strong growth deserving of a PE premium, despite lessening valuation support from global freight peers.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp; We make further material upgrades to our earnings forecasts in each outlook year
Target price:&nbsp;Lifted to NZ$98 from NZ$90, as earnings revisions more than offset peer group de-rating&nbsp;



Super-cycle benefit; stronger for longer


The freight rate super-cycle appears to have peaked. Importantly, MFT is more exposed to contract rates rather than spot rates; contract rates are substantially lower than spot rates but are increasing. While we believe the risk to spot rates is to the downside, the risk to contract rates is upwards. This should allow MFT to continue to leverage the freight super-cycle to a greater extent until contract rates peak. As contract rates lag spot rates&nbsp;this may not be for another 6–9 months. In short, the level of Air &amp; Ocean over-earning could be substantially greater in 2H22 than 1H22.&nbsp;


Volume growth pleasing&nbsp;


Pleasingly volume momentum continues across all three products: Air &amp; Ocean volumes were up +30%, Transport volumes were up ~+15% in each region (higher in the Americas), and Warehousing inventory was boosted by the customer response to congestion. While some of the volume uplift is not sustainable (i.e. the modal shift from sea to air freight boosted air freight volumes by +40% in 1H22), we believe market share gains are a key driver, suggesting MFT's underlying business momentum remains robust. However, volume growth has created capacity challenges, particularly in&nbsp; Transport, with management stating that its "networks are full".&nbsp;&nbsp;


Valuation support has weakened


Notwithstanding further material earnings upgrades in this report,&nbsp;we believe there is scope for further upward earnings revisions&nbsp;through 2H22. While&nbsp;MFT's&nbsp;'E' (earnings) is supportive to its 'P' (share price), its 'PE' multiple is less so. Relative valuation support from its key global peers has weakened in recent weeks.&nbsp;


Mainfreight Ltd

Mainfreight: 1H22 — Boom! Boom!