Express Package And Business Mail Will Gain Market Share Via Improved Service Quality

Key Takeaways

• Strategic enhancements in air fleet and automated facilities should lower costs, boost efficiencies, and improve earnings.
  
• Market gains and operational optimizations in various divisions are likely to increase revenue, margins, and overall earnings.
  
• Freightways faces potential financial strain due to economic challenges, margin contractions, and reduced demand in premium services, affecting overall profitability.

Catalysts

Provides express package and business mail, and information management services in New Zealand, Australia, and internationally.

• Freightways is improving its market position and gaining market share across key services like Express Package and Business Mail, which should lead to increased revenue growth as they continue to optimize pricing and enhance service quality.
  
• The strategic shift to a more efficient air fleet, transitioning to 737-800 aircraft, is expected to reduce operating costs and emissions, which could boost net margins.
  
• Margins in the Express Package division are being improved through price increases and operational efficiencies in key brands like New Zealand Couriers and Post Haste, potentially enhancing overall earnings.
  
• The expansion and optimization of automated sorting facilities at Allied Express will likely improve operational efficiencies, resulting in higher margins and increased earnings.
  
• The expected outcome of a tender in the Medical Waste division could lead to significant new revenues and improve utilization, resulting in higher overall earnings and improving net margins.

Freightways Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Freightways Group's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 7.4% in 3 years time.
• Analysts expect earnings to reach NZ$108.6 million (and earnings per share of NZ$0.63) by about April 2028, up from NZ$74.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$96.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 24.3x today. This future PE is lower than the current PE for the NZ Logistics industry at 27.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

Freightways Group Future Earnings Per Share Growth

Risks

• The economic environment in New Zealand remains difficult, with GDP decline and subdued economic activity, which could negatively impact Freightways' revenues and earnings.
  
• Certain divisions like Big Chill and businesses like ProducePronto and MSL are experiencing margin contraction, indicating pressure on Freightways' overall net margins.
  
• Delays in tender outcomes (such as the Victoria Health tender) and ongoing margin contractions in the Information Management and Waste businesses present challenges that could affect Freightways' future earnings.
  
• The premium point-to-point services are experiencing reduced demand due to economic conditions, likely impacting revenues within those service lines.
  
• Transition costs related to aircraft fleet updates and potential economic downturns in the New Zealand market may introduce additional financial strains and impact profitability.

Valuation

• The analysts have a consensus price target of NZ$11.269 for Freightways Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NZ$1.5 billion, earnings will come to NZ$108.6 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of NZ$10.15, the analyst price target of NZ$11.27 is 9.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.