Dog trainer Chris Dunphy drives the Mainfreight expansion truck

Friday 29th June 2001

Mainfreight founde rs Neil Graham and Bruce Plested have always enjoyed a good, sometimes fawning press. Journalists have raved about their energy, vision, and philanthropic acts.

The same can't be said about Mainfreight's relations with investors.

Following an Australian-driven profit collapse for the March year the transport operator's share price recently fell to 100c, just a flea's breadth above the 96c price at which they were issued when Mainfreight floated five years ago.

The share price graph should give considerable trouble to anyone who believes markets are rational. Since the float the shares have twice reached 200c and twice halved again but the ups and downs don't seem to bear any relation to profitability which has, until the latest year, grown steadily with the exception of a small slip in 1999.

Nor do they bear any relation to revenue. In 1996 group sales were $131 million, up from $77 million the year before. They have grown by an annual average of 26%, to $411 million last year.

As this is precisely what was promised Mainfreight's unpopularity with investors is hard to fathom. They presumably take the gloomy view that most of the company's growth will never be profitable.

In the hot seat is Chris Dunphy, who has masterminded the group's international expansion since cutting his teeth as an investment banker at Buttle Wilson and Ord Minnett in the 1980s.

Dunphy spent three months in Australia in 1999 negotiating the $12 million purchase of K&S Express, the LCL (less than container load) division of K&S Corporation.

This is the division that Plested, releasing the "shock" result, described as "a dog."

"We knew we were buying a poor quality business," he was reported as saying, "but it was there, it was available and it gave us national distribution."

This seems fair enough - provided the company didn't pay too much, and provided it knew how to fix the problems.

The first year was admittedly unencouraging.

As Plested explained, K&S Express, now renamed Mainfreight Distribution Pty (MDP), was part of a larger business so it didn't have its own accounting and IT systems. Mainfreight had to put some in.

For some reason it elected not to graft MDP into the systems used in the existing Australian business but tried instead to make it a testing ground for the new Maintrak operating system Mainfreight was developing over here.

The experiment was not a success. Throughout 2000 fuel costs rose steadily but the switchover to a new, untried system meant Mainfreight was unable to lift its prices to recover the increases until October.

By that time Australia had introduced GST, which dampened demand and consumer spending. The price rise, the company noted, "was not successfully implemented."

A mere systems glitch need not unduly worry investors but there was more to it than that. At the time Mainfreight bought MDP it was "estimated" to be losing $A4 million ($5 million) a year. Mainfreight is fighting to improve service and cut costs but it can't say yet when MDP will break even.

What investors seem to have missed in the general gloom is that Mainfreight has bought loss-making companies before, both in Australia and elsewhere, and turned them around. Buying loss-making companies and turning them around is the company's stated strategy.

In 1999 it blamed a 5% profit fall - from $7.3 million to $6.9 million - on a "disastrous result" from the newly acquired Australian and international operations.

These had been losing money when bought. As with K&S there was an early glitch - Mainfreight made the mistake of cutting costs too deeply.

"We found out the hard way that we needed an overkill of management in Australia," Dunphy explained.

Those businesses have now been successfully restructured and are profitable.

A case in point is LEP International Pty, which Mainfreight bought for a dollar in 1999. In its first year it lost $A700,000.

In the second year of made a modest profit and last year it made $A1.3 million.

In the US Mainfreight bought, also in 1999, a 49.5% stake in CaroTrans. It was also losing money at the time and is now breaking even.

The MDP money hole certainly looks wider and deeper than previous turnaround jobs.

It appears all of the March year's $6.5 million profit drop is attributable to the new Aussie outfit.

But that, hopefully, is as bad as it will ever get. The company has dragged all the K&S skeletons out of the closet and has expensed everything that can be expensed.

Shoeshine suspects the market's pessimism is driven by a simplistic assumption every Kiwi business that tries to cross the Tasman ends up failing. Air New Zealand's headline-grabbing Ansett debacle won't have helped. Nor will the Fletcher Challenge breakup.

But Mainfreight's strategy has so far proved sound. As a company likely to turn over $500 million this year it deserves more attention, and better analysis, from sharebrokers and their clients.

For a country that rails against local companies being bought by foreigners we're perversely loath to support our own.

As Nufarm's defection from the New Zealand Stock Exchange shows, if that doesn't change there will one day be nothing for us to invest in.

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