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.
Written by
Eddie Stobart Logistics |
An attractive dividend yield with growth |
FY results update |
General industrials |
29 March 2019 |
Share price performance
Business description
Next events
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Eddie Stobart Logistics is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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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SCISYS reported strong performance in FY18, led by the UK-focused Enterprise Solutions and Defence (ESD) division, which benefited from a reinvigorated sales team. We expect the Space division to lead growth in FY19, following the recent spate of contract wins, while the enlarged Media Solutions division has strong potential for margin recovery. We have upgraded our revenue forecasts but maintained profits as the group needs to invest in its infrastructure to sustain growth. Noting management’s new goal to achieve revenue of £75m and operating profit of £7.0m by end FY22, we believe the stock is attractive on c 13x our FY20e EPS.