FRE - Freightways

[Ferg]

Freightways, the poor cousin to MFT, reported it's annual result for FY22 today.

TLDR: higher sales, NPAT and dividend.  Oz courier acquisition.  No red flags.

The full announcement is here: https://www.nzx.com/announcements/397313

A final fully imputed dividend of 19c record date 16 Sept 2022, payable 3 Oct 2022 (last year 18c; full year is 37c versus last year's 33.5c)

Highlights: this year; last year; YoY change%

Revenues $873m; $800m; +9%
EBITA $126m; $106m; +19%
NPAT excl. BCD FV Adj $74m; $71m; +4%
NPAT $70m; $48m; +46%
Basic EPS 42.3c
Current SP of $9.55 gives a backward looking P/E ratio of 22.6.
Annual 12 months gross dividends are $0.514 gives an historic dividend yield of 5.4%

An additional fair value (FV) adjustment to the Big Chill Distribution (BCD) earn out liability of +$4m suggests BCD is going better than forecast at the time it was acquired.

Given the growth in NPAT before the BCD adjustment was less than the revenue growth, this means expenses grew at a greater rate.  FRE go into some detail explaining the extra costs this year so it is good to see they have front footed this.

I would say another year of "slowly slowly catch the monkey" through managed growth, of which I am a huge fan.  Today FRE announced another acquisition.

The gist is that FRE are jumping the ditch and expanding into courier deliveries in Australia with the purchase of Allied Express Transport Pty Ltd.  The deal:

• Cost is $160m made up of $60m cash (or debt?) and $100m shares
• 100% acquisition
• $100m of shares is priced at $9.66; ~10.4m shares to be issued
• with ~166m shares currently on issue this has the effect of adding an additional 6% of shares
• Full year EBITA ~$23m
• $160m/$23m EBITA suggests a P/E ratio of just under 7
• This will be a launch pad for more activity in Australia
• The Australia operations will provide learnings for FRE regarding handling large parcels in NZ

In summary I like what I see.  I haven't done my full analysis yet but I see no long term red flags although I see FRE warning of possible activity slow down with an impending recession.

[Left Field]

Interesting to see how successful they have been in Australia. Not surprising to see ASX dual listing being activated.

https://www.nzx.com/announcements/416649

The end result reflected these contrasts. Overall, operating revenue increased by 29% from last year, with our Australian businesses growing by 143% and our New Zealand businesses increasing by 6% - net profit after tax lifted by 7% overall.

[Ferg]

Freightways will start trading on the ASX from 14 Sept 2023:
https://www.nzx.com/announcements/417926

[Onemootpoint]

Earlier:


"New Zealand-based logistics provider Freightways (FRW) is set to commence trading on Thursday, September 14 2023.
However, while outlining in its recent annual report its intention to list on the ASX, and, an announcement on the New Zealand stock exchange to the same effect – how much money the company is raising is not yet available on the ASX website.
Furthermore, the company has not yet released a prospectus for Australian investors."

https://themarketherald.com.au/four-new-companies-listing-in-september-novo-resources-james-bay-minerals-freightways-and-far-northern-resources-2023-09-11/

Doesn't appear to be an issue; just wondering why the  info is a bit scarce.

[winner (n)]

Think that Aussie report a bit dumb ..FRW just becoming dual listed as a foreign-exempt entity in Australia....not an IPO as was made out in the article

Probably will need to raise capital one day if growth really takes off and being dual listed possibly gives them greater scope

[Ferg]

For sure.  That is a weirdly worded article....especially given Freightways didn't say they were raising capital on the ASX.

[Onemootpoint]

Big business leaders upset about economy | nzherald.co.nz

https://www.youtube.com/watch?v=trYnVZqMZGg

FRW CEO refers to More money to be invested in Aus. Better return on investment at the moment. But working hard to attract business in NZ. Seems positive especially from 2nd quarter next year. But for now 'business leaders' in the video do not seem to be too optimistic on the short term.

[Ferg]

That Madison Reidy is good.  Relevant, to the point & informed.

FRW released a trading update for Q1 as part of their ASM:
https://www.nzx.com/announcements/420554

Highlights:

• Revenues up 25%; note a 5% decline in existing customer volumes was offset by the Aust Alliance acquisition
• EBITDA up 12%, EBITA up 7%, NPAT down 5% due to higher amort and interest costs
• Q2 is expected to be somewhat soggy, but H2 per the MwM video could see a rebound
• Risk of lower earnings in total for FY24, despite pressure from labour costs easing

[Ferg]

Freightways announced their results for FY2025 today:
https://www.nzx.com/announcements/456899

EPS at 44.8c is an all time high, but they are struggling to convert higher sales to historic pre-COVID NPAT%.  Previously this sat around 10% of sales; last financial year was 6.2%.

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The share price is up there in terms of historical P/E ratios:

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I have posted a similar graph for others and will explain it.  If the SP was 18xEPS then it would follow the green line, if the SP was 24xEPS it would follow the orange line.  The blue line is the monthly closing share price.  I change where the orange and blue lines sit depending on what a company's SP does.

Prior to COVID the SP was sitting around the midpoint of around 21x EPS....the SP went crazy through 2020/2021 as earnings fell away, and then the SP fell from June 2021 until September 2023 to under $8.  The SP has bounced back in the past 24 months to today's price of ~$11.70.  Note the graph stops at June 2025.  So the current SP at 26x FY25 EPS is either over-priced or the market is expecting more good things to come from FRW.

[winner (n)]

Good stuff Ferg

That profit margin quite significant eh. If it was about 10% profit would be about $40m higher.

Do you think they'll recover some of that or is 6%/7% the new norm?

[Ferg]

Thanks winner.  Good question.."Do you think they'll recover some of that or is 6%/7% the new norm?"

I was wondering the same thing so went looking through their presentation from today:
https://api.nzx.com/public/announcement/456899/attachment/449680/456899-449680.pdf

Short answer = "yes I think they will recover some of that NPAT%, but it will be a while before they see 10% again, if ever".

Regarding FY26 they said this:
"Any positive economic momentum, along with our efficiency and pricing initiatives, would assist to expand margins slightly in the year ahead"
...so it looks like they are aware of the issue but aren't promising much.

They implemented an efficiency project a couple of years ago which is paying off (albeit slowly)....I suspect a number of businesses are still in hangover mode from COVID imposed costs they can't quite unwind.  Plus they likely had 'indigestion' after the Big Chill purchase and the Oz Allied Express acquisition.  Throw in the onerous ESG/climate reporting requirements from the NZX and that will likely suck up some of the future savings.

On the positive size there were 3 items of interest in the presentation from my brief skim read.  Their investment in Ruakura inland port (which is part of POT) was breakeven 9 months earlier than planned, and has room for additional volumes.  It sounds like this un-bunged 2 other sites for Big Chill & they are looking to further opportunities in that space.  Secondly, FRW added automated sorting systems to their largest depots in NSW and Victoria which has boosted volumes and enabled more accurate pricing.  They are expecting more volumes from both of these.  Thirdly, volumes are currently strong and expected to improve further with the wider economy.

Given variable costs are around 40-42% of sales, and GM% has improved on last year, most of the increase in sales should also contribute a higher NPAT%.  There is likely some sort of linkage to fuel/oil costs but I have not looked into that.

I also suspect they are in the market for another acquisition.....but like HLG they are a slowly slowly catch the mon(k)ey type of business, and not rapid expansion for the sake of a managerial KPI.

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[Ferg]

One of the brokers has released a report with a forecast NPAT of $93m on sales of $1.1b for FY26 which puts them on an 8.4% NPAT%.  That would be good to see and it would be the highest NPAT% in the last 7 years if it happens.

$93m NPAT translates to 52c EPS which puts FRW on a 1 year forward P/E ratio of around 23.

[Basil]

but like HLG they are a slowly slowly catch the mon(k)ey type of business, and not rapid expansion for the sake of a managerial KPI.

One of the brokers has released a report with a forecast NPAT of $93m on sales of $1.1b for FY26 which puts them on an 8.4% NPAT%.  That would be good to see and it would be the highest NPAT% in the last 7 years if it happens.
$93m NPAT translates to 52c EPS which puts FRW on a 1 year forward P/E ratio of around 23.

Very similar CAGR to HLG and yet on broker forecasts for FY26 HLG on half that forward PE.  Hmmm

[Ferg]

Trading update at the ASM today:
https://api.nzx.com/public/announcement/461650/attachment/455433/461650-455433.pdf

A couple of things to note:
"The NZ economy is no longer a headwind, although has yet to spark any material growth; some signs the Australian economy is slowing although our business remains buoyant."

Q1 trading update: revenue up +8.6%; NPAT up +22.5%.

FY26 forecast: "The slow improvement in NZ volume from H2 FY25 has continued but remains at modest levels" and "Any positive economic momentum, along with our efficiency and pricing initiatives, would assist to expand margins in the year ahead."

Nothing firm for FY26 guidance but Q1 is looking good.