An attractive dividend yield with growth

Eddie Stobart Logistics 29 March 2019 Update
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Eddie Stobart Logistics

An attractive dividend yield with growth

FY results update

General industrials

29 March 2019

Price

99p

Market cap

£376m

Net debt (£m) at November 2018

159.7

Shares in issue

379.3m

Free float

74%

Code

ESL

Primary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

(1.5)

1.0

(21.4)

Rel (local)

(3.1)

(6.0)

(22.7)

52-week high/low

145.5p

85.5p

Business description

Eddie Stobart Logistics is a market leader in end-to-end, multi-modal transport and logistics. Operations are primarily focused in the UK, with some activities in mainland Europe. Key customer segments include retail, consumer, industrials and increasingly, e-commerce.

Next events

Q1 results

xxx

Analyst

Dario Carradori

+44 (0)20 3077 5700

Eddie Stobart Logistics is a research client of Edison Investment Research Limited

Recent strategic acquisitions have transformed Eddie Stobart Logistics (ESL) into a full end-to-end logistics provider. This strategy has resulted in strong FY18 revenue (+35% y-o-y, of which +18% y-o-y organic growth) and earnings growth (EBIT +14% and EPS +15%), reflecting the strength of its pay-as-you-go model and its ability to achieve synergies. We expect ESL to focus on margin improvement and cash flow generation in FY19, and now forecast a 13% EPS CAGR in FY18–20. Following recent share price weakness, the stock offers a 6.4% dividend yield for FY18 with a 5% CAGR in FY18–20, on our updated estimates. ESL continues to trade at a large discount to logistics companies in the UK and Europe on P/E multiples.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

11/17

623.9

37.8

9.8

5.8

10.1

5.9

11/18

843.1

49.2

11.4

6.3

8.7

6.4

11/19e

969.9

60.7

13.1

6.6

7.6

6.7

11/20e

1,034.9

67.9

14.7

6.9

6.7

7.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong revenue and earnings growth progression

ESL reported strong revenue growth (35% y-o-y) and earnings progression (underlying EBIT +14%, underlying EPS +15%), boosted by both organic growth (+18% revenue y-o-y) and acquisitions (+17%). EBIT margin reduced from 7.8% in FY17 to 6.6% in FY18, reflecting the integration of the acquired companies coupled with strong organic growth and management’s decision to invest in quality service and customers’ loyalty. Margins improved in H218 (7.7% vs 5.0% in H1) and ESL expects further improvement in FY19. Its adjusted operating margins have consistently been well above competitors’ levels for several years and we estimate they will be c 40% higher in FY19 (based on consensus).

We now expect a 13% EPS CAGR FY18–20

The trend for companies outsourcing logistics to achieve savings continues to support ESL’s growth outlook, especially in the consumer and retail sectors, where there are revenue and cost pressures. Furthermore, the shift to e-commerce and the high market fragmentation offer medium-term growth opportunities. We now expect an improvement in EBIT margin in FY19 (6.8% vs 6.6% in FY18), driven by network optimisation (now largely completed), synergies from recent acquisitions and a focus on improving underperforming contracts. EBIT margin pick-up combined with revenue growth drives 14% EBIT and 13% EPS growth in FY18–20e on our revised forecasts. Even assuming slower dividend growth, we believe the dividend remains one of the key attractions of the stock, as we estimate a 6.4% yield in FY18 with growth of 5% pa in FY19–20e.

Valuation: Dividend support and P/E discount

In addition to an attractive dividend yield, ESL continues to trade at a large discount to the average P/E of UK (c 30% discount) and EU logistics companies (c 60% discount). While we have reduced our DCF valuation to 175p (from 190p) to reflect higher FY18 net debt than we previously assumed, our valuation still implies significant potential upside to the current share price.

FY18 results overview: A year of strong growth

Strong revenue and earnings growth

Key highlights of the FY18 results were:

Revenues grew by 35% y-o-y to £843m, driven roughly 50/50 by organic growth (£162m new contracts win) and acquisitions. On a sector basis, e-commerce continues to be the key growth driver (+65% y-o-y), but retail and consumer also continue to perform strongly (+43% and +26%, respectively).

Underlying EBIT grew by 14% driven by the revenue growth and despite an EBIT margin reduction (6.6% vs 7.8% in FY17). The reduction reflected the task of integrating the acquired companies while at the same time experiencing very strong organic growth. The company has said it focused on offering quality service to new clients rather than on margin improvement, which will be the key focus for FY19. Hence lower margins also reflected a conscious decision by management to invest in a quality service for its customers. Margins already improved in the second half of FY18 (7.7% vs 5.0% in H1) and the company expects a further improvement in FY19.

Net debt increased to £160m at the end of FY18, from £109 one year earlier. This reflects the impact of the increase in working capital to support new contract roll-outs as well as the impact of acquisitions (£24m for The Pallet Network, TPN). We calculate a net debt/EBITDA of 2.4x at the end of 2018 (based on pro-forma EBITDA, which includes the full-year impact of the TPN acquisition), which is above the 2.0x targeted by the company. ESL said it expects a return to historical levels of cash generation in FY19 and that it will move towards 2x net debt/EBITDA in FY19.

The dividend grew 8.6% y-o-y to 6.3p/share. This implies a payout ratio of 55% based on adjusted EPS.

Recent acquisitions (iForce, Speedy Freight, Logistics People and TPN) continue to trade in line with company expectations and have contributed to the strategic repositioning of the company on a full range of solutions for its customers as well as the addition of more innovative capabilities.

Logistics outsourcing is key structural trend supporting growth

We believe the solid revenue growth shows that the trend for companies deciding to outsource logistics to achieve savings continues to support ESL’s growth outlook, especially in the consumer and retail sectors, where there are revenue and cost pressures. In our view, the outsourcing opportunity is large, with 45–80% of logistics and supply chain services in the UK and Europe still performed in house (according to EU Commission estimates). ESL’s pay-as-you-go model offers customers significant opportunities for cost savings and flexibility compared to running their own logistics networks. Furthermore, the shift to e-commerce provides another growth opportunity for ESL, thanks to its strong presence in the segment, which has led to strong growth historically (+65% in FY18).

The UK logistics market remains very fragmented, with significant opportunities for consolidation. While in the short term we would expect ESL to focus on extracting synergies from recent acquisitions rather than targeting new ones, in the medium term, the opportunity remains large, especially considering the positive track record so far (with a weighted average EBIT acquisition multiple of 5.7x for iForce, Speedy Freight, Logistics People and TPN vs FY19 EV/EBIT for ESL of 7.6x).

Forecast changes

Strong EPS growth, healthy EBIT margins

Following a year of strong revenue growth (acquisitions and new contracts), we expect the key focus in FY19 will be on margin improvement and cash flow generation. In particular, we now model a 0.2 percentage point pick-up in FY19 adjusted EBIT margins to 6.8%, reflecting the efforts of the company on network optimisation (now largely completed) and synergies from recent deals, as well as the focus on improving underperforming contracts. We highlight that EBIT margins remain at very healthy levels and above competitors’ margins. Our estimated adjusted EBIT margin of 6.8% (5.4% on the reported basis) for ESL in FY19 compares to a 4.8% average for other logistics companies, as shown in Exhibit 1.

Exhibit 1: FY1 EBIT margin for logistics companies

Source: Refinitiv, Edison Investment Research. Note: *Edison Investment Research forecast.

While we have made only small changes to our EPS forecasts for FY19–20, we reduced our DPS forecasts for FY19–20 by an average 9%, reflecting our expectations of lower growth as we believe continuous revenue progression requires further investment in working capital. We highlight, however, that the dividend remains one of the key attractions of the stock, as we calculate a 6.4% dividend yield in FY18, with growth of 5% a year in FY19–20 on our forecasts.

Exhibit 2: Forecasts revisions

£m

FY18

FY19e

FY20e

Revenue

New

843.1

969.9

1,034.9

Old

817.9

911.2

973.1

Change %

3%

6%

6%

EBITDA

New

62.9

74.7

81.7

Old

66.3

77.3

84.7

Change %

-5%

-3%

-4%

Adjusted EBIT

New

55.3

65.9

72.4

Old

57.3

67.4

74.1

Change %

-4%

-2%

-2%

Normalised EPS, p

New

11.4

13.1

14.7

Old

11.5

13.4

15.0

Change %

-1%

-2%

-2%

DPS, p

New

6.3

6.6

6.9

Old

6.2

7.1

7.8

Change %

2%

-7%

-11%

Source: Edison Investment Research. Note: FY18 new – reported, old – estimates.

Valuation

Large discount to peers’ P/E, attractive dividend yield

ESL continues to trade at a P/E discount to UK (c 30% on FY1) and European competitors (c 60%). The dividend yield also stands out when compared to UK and EU logistics companies.

Exhibit 3: P/E and dividend yield for a selection of UK and EU logistics companies

Market cap (£m)

P/E (x)

Dividend yield

FY0

FY1

FY2

FY0

FY1

FY2

Clipper Logistics

269

17.7

15.8

13.9

3.2%

3.6%

4.2%

Royal Mail

2,341

5.2

8.7

9.3

10.0%

10.2%

10.1%

Wincanton

292

7.6

7.3

7.0

4.2%

4.6%

4.9%

UK average

10.2

10.6

10.1

5.8%

6.1%

6.4%

Deutsche Post

30,329

16.9

12.9

11.5

4.0%

4.3%

4.7%

DSV

11,776

24.7

23.0

21.0

0.4%

0.4%

0.5%

Kuehne und Nagel

12,288

20.9

19.8

18.3

4.5%

4.6%

4.8%

Panalpina Welttransport

2,973

50.0

35.1

28.2

2.3%

2.5%

2.7%

EU average

28.1

22.7

19.8

2.8%

3.0%

3.2%

Eddie Stobart Logistics

372

8.6

7.5

6.7

6.4%

6.8%

7.1%

Source: Refinitiv and Edison Investment Research. Priced as of 27 March 2018.

While we have reduced our DCF valuation to 175p (from 190p) to reflect higher net debt than we expected at the end of FY18 (£160m vs. £141m), our updated valuation still implies significant upside potential to the current share price. Our DCF valuation is based on an unchanged 6.9% WACC, implying an EV of £808m (11x FY20 EV/EBIT) and equity value of £663m (12x FY20 P/E).

Exhibit 4: Financial summary

£m

2016

2017

2018

2019e

2020e

November year-end

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

570.2

623.9

843.1

969.9

1,034.9

EBITDA

 

 

47.4

55.3

62.9

74.7

81.7

Operating Profit (before amort. and except.)

41.3

48.5

55.3

65.9

72.4

Intangible Amortisation

(9.5)

(11.1)

(13.8)

(13.8)

(13.8)

Exceptionals

(3.3)

(17.2)

(8.8)

0.0

0.0

Other

(1.2)

(0.6)

(1.1)

0.0

0.0

Operating Profit

27.2

19.6

31.6

52.1

58.6

Net Interest

(16.0)

(9.6)

(6.1)

(5.3)

(4.5)

Profit Before Tax (norm)

 

 

24.0

37.8

49.2

60.7

67.9

Profit Before Tax (FRS 3)

 

 

11.2

9.9

23.6

46.8

54.1

Tax

(1.3)

(5.0)

(7.4)

(10.9)

(12.2)

Profit After Tax (norm)

22.7

32.8

41.8

49.7

55.7

Profit After Tax (FRS 3)

9.9

4.9

16.2

35.9

41.9

Average Number of Shares Outstanding (m)

276.7

326.8

367.0

379.3

379.3

EPS - normalised (p)

 

 

7.9

9.8

11.4

13.1

14.7

EPS - normalised and fully diluted (p)

 

7.9

9.8

11.3

13.0

14.6

EPS - (IFRS) (p)

 

 

3.3

1.2

4.4

9.5

11.0

Dividend per share (p)

0.0

5.8

6.3

6.6

6.9

EBITDA Margin (%)

8.3

8.9

7.5

7.7

7.9

Operating Margin (before GW and except.) (%)

7.2

7.8

6.6

6.8

7.0

BALANCE SHEET

Fixed Assets

 

 

259

339

386

380

374

Intangible Assets

219

272

312

298

285

Tangible Assets

38

60

66

74

82

Investments

2

7

7

7

7

Current Assets

 

 

150

163

240

275

293

Stocks

2

2

3

4

4

Debtors

134

149

231

266

284

Cash

14

12

5

5

5

Other

0

0

0

0

0

Current Liabilities

 

 

(119)

(142)

(216)

(241)

(255)

Creditors

(112)

(134)

(180)

(206)

(219)

Short term borrowings

(6)

(8)

(36)

(36)

(36)

Long Term Liabilities

 

 

(201)

(147)

(174)

(164)

(148)

Long term borrowings

(173)

(114)

(129)

(115)

(98)

Other long term liabilities

(28)

(34)

(45)

(49)

(50)

Net Assets

 

 

89

212

236

250

265

CASH FLOW

Operating Cash Flow

 

 

30

30

8

67

73

Net Interest

(10)

(8)

(7)

(6)

(5)

Tax

(2)

(3)

(4)

(11)

(12)

Capex

(1)

(6)

(14)

(12)

(13)

Acquisitions/disposals

(2)

(48)

(22)

0

0

Financing

(5)

38

29

0

0

Dividends

0

(5)

(22)

(23)

(25)

Net Cash Flow

10.0

(2.4)

(32.3)

14.0

17.4

Opening net debt/(cash)

 

 

170

166

109

160

146

HP finance leases initiated

0

0

0

0

0

Other

(6)

58

(18)

0

0

Closing net debt/(cash)

 

 

166

109

160

146

128

Source: Company data, Edison Investment Research.

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This report has been commissioned by Eddie Stobart Logistics and prepared and issued by Edison, in consideration of a fee payable by Eddie Stobart Logistics. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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General disclaimer and copyright

This report has been commissioned by Eddie Stobart Logistics and prepared and issued by Edison, in consideration of a fee payable by Eddie Stobart Logistics. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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