Investments deep dive - Mainfreight

Mainfreight is one of New Zealand’s best-known transportation and logistics companies. The MAS KiwiSaver Plan and the MAS Retirement Savings Plan funds have invested in Mainfreight for well over a decade, and we had a chat with Tom Phillips from investment manager JBWere about why Mainfreight is such a good investment, and what the future holds for the company.

Who is Mainfreight and what do they do?

Mainfreight was founded in 1978 and listed on the New Zealand stock exchange in 1996. It’s now one of the largest freight companies in New Zealand.

In many ways, their business is pretty simple - transporting goods from point A to point B. But it’s their people and approach to business which sets them apart from their competitors. Key to the company’s success is a business centred on family, partnership and adaptability.

From humble beginnings in a highly regulated industry, Mainfreight now enjoys global reach, operating in 26 countries transporting products for recognised brands around the world. Furthermore, its success has led to it becoming one of New Zealand’s largest listed companies by value.

What first interested you in Mainfreight?

We were searching for an investment with a strong domestic franchise, pricing power and reputable management and Mainfreight seemed to tick all the boxes. We initially had some reservations about the sector in which Mainfreight operated within, believing larger global operators would be better positioned to deliver low cost domestic distribution. We felt domestic operators would become price takers to global distributors.

But when we analysed the company’s products, services, management, and competitors, investing in Mainfreight made a lot of sense. We were also attracted by some of the less quantifiable factors too, particularly their focus on the importance of loyalty, service and an ability to adapt to changing market conditions.

How did you approach your initial investment?

The investment case for Mainfreight strengthened after we worked through our qualitative assessment, and then measured the company against quantitative selection criteria for investment. These criteria included meeting key criteria around return on capital, margin sustainability and cost to income for investment.

Once we decided to make an initial investment, we were pleased to see Mainfreight’s management team continue to deliver outstanding results and make meaningful progress against their long-term strategy.

Why have Mainfreight performed so well?

Mainfreight’s track record of positive annual profit growth over a long period of time has been quite remarkable.

Mainfreight has weathered events that sank many of their competitors. The company has endured a tech bubble, the global financial crisis and now COVID-19, and the company’s annual profit growth over the past 20 years has been around 14.5%. We think a key part of this resilience is a simplistic, clear and an uncomplicated people-oriented operating model and an aligned management team.

Actual annual net profit for Mainfreight can be seen in the graph below.

Source: Bloomberg. For the period 1/01/2010 to 1/01/2020. New Zealand Dollars.

The graph illustrates Mainfreight’s remarkable record to deliver sustained profit growth, but it comes down to a few basic principles. The management team have focused on keeping the business simple, building a loyal shareholding base, protecting its core product and servicing offerings, and maintaining a long-term mindset on sustainable growth.

Mainfreight’s strong management has been particularly important in 2020. When times are as uncertain as they have been over the past year, experience and stability are essential and Mainfreight’s management team is very strong in both areas.

What does the future hold?

Given its current trajectory, track record and optionality, we expect Mainfreight to be a strong performer on the New Zealand sharemarket. Increased profits will be driven by market growth, market share gains and margin improvement – not by acquisitions although an additional “bolt on” cannot be ruled out. Globally, freight volumes have delivered, on average, around 4% annual growth over the past decade. By contrast, Mainfreight’s growth rates are almost double that in the US and Europe, locations where they have less than 1% market share. There is considerable room for growth in these markets and with increased volumes comes greater efficiency, improved margins, and more profit.

In an era with low barriers to entry, loyalty, relationships, and New Zealand’s can-do attitude mean Mainfreight is a business well positioned to enjoy the benefits of globalisation and increased servicing requirements.