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Mainfreight (NZX:MFT)

The Jenny Ruth Column

Monday 26th June 2006

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The company has been struggling since the 1990s to turn a buck in Australia, relying on its solid New Zealand operations to make up for losses incurred across the ditch.

The company has always argued that it had to be in Australia in order to protect its New Zealand business: people making decisions about freight want to be able to deal with a single company across both countries.

"We must influence the freight flow from Asia and the US into our business in New Zealand and Australia. If you are overseas, you don't get the opportunity to talk about just New Zealand. You have to talk about Australasia and Australasia is still a very small part of their overall business," managing director Don Braid said three years ago when its Australian losses were actually escalating.

"If we didn't have that investment over there, we would have a smaller business over here." Nevertheless, he was still promising to fix the problem "come hell or high water."

Fund managers had already been complaining for years about Mainfreight founder and chairman Bruce Plested's "100-year view" when they wanted more immediate results.

Finally, the company has delivered handsomely. Its domestic Australian operations delivered $4.16 million in earnings before interest and tax (EBIT) for the year ended March compared with a $315,000 loss the previous year and a $5.47 million loss in 2004.

Its Australian international operations also improved significantly by delivering $12.86 million in EBIT, a 71.5% increase.

"I think we've known that we've had a turn-around there for probably the last two or three years. We just didn't have the numbers to back that up," Braid says.

A key factor has been getting an Australian management team to buy into the Mainfreight culture. "The excitement for us is that our recipe is working in Australia - and in America, for that matter. We know what we've been able to achieve in a country with four million people. We're now operating in countries with 20 million people in Australia and 240 million people in America and 1.4 billion people in China," he says.

Because the company has also been expanding elsewhere internationally, ambitious to become a global logistics operator. Its operations outside New Zealand contributed 52% of sales and 43% of EBIT in the latest result. (The bottom line, a $29 million net profit, was more than double last year's.) In the US, its EBIT more than doubled to $4.03 million.

Braid is promising the company won't be resting on its laurels. "We're going to work hard to show this result is just the start of a lot of exciting things for Mainfreight."

While the company is getting 20% annual growth from its Chinese associate, Braid says that's not good enough in the context of the size of trade between China and the US.

"While it's prudent to be somewhat cautious in the Chinese market - you need to have good partners there and you need to be very careful about how you drive your business there - but we would like a step up in growth," he says.

The company is also considering its options in Britain where it gained a 46% stake in a small operation through its takeover of Owens Group. Braid says Mainfreight's minority stake means it doesn't have much influence over that business.

"We're reviewing our position in that market and are likely to look at something bigger and better in the UK/European market."

He certainly demonstrated his faith in the company's future after the results were announced in late May by buying another 30,000 shares from a fellow director at $5.65, just below the record $5.80, taking his stake to nearly 1.94 million shares.

The share price has more than doubled in the last year, but has dropped back in the last couple of weeks to $5.30 mid-week last week.


You can buy a transcript of the entire interview behind this column ($5) or subscribe to a year's worth -- 48 interviews ($100) by emailing: info@jennyruth.com or visiting the Good Returns Bookstore by clicking here:
http://www.goodreturns.co.nz/books/product_info.php?products_id=456

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