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Eddie Stobart Logistics — Interims show delivery on growth plans

Eddie Stobart Logistics — Interims show delivery on growth plans

Eddie Stobart Logistics’ (ESL) H1 numbers, well trailed at the trading update in July, showed high levels of growth (13% revenues and 14% EBIT) consistent with management guidance and market expectations. New contract wins, which totalled £25m in the first half, were bolstered by organic growth in key business units. The iForce acquisition is integrating well, with the post-period acquisitions of Speedy Freight (announced at the trading update) and the remaining 50% of the Logistics People (announced yesterday) set to benefit earnings. Taken together, these growth drivers helped ESL achieve a slight increase in EBIT margin from 5.8% to 5.9%, which is well above other listed logistics firms. Also, H117 witnessed the announcement of the company’s maiden dividend of 1.4p. We increase our earnings and FY17 acquisition charge to reflect post-balance sheet events and nudge up our fair value to 203p.

Analyst avatar placeholder

Written by

Eddie Stobart Logistics

Interims show delivery on growth plans

Interim results

Industrial support services

1 September 2017

Price

160p

Market cap

£573m

Estimated net debt (£m) at 30 November 2017

90.3

Shares in issue

357.9m

Free float

72.2%

Code

ESL

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.6)

1.0

N/A

Rel (local)

(1.3)

2.0

N/A

52-week high/low

163.5p

157.5p

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

FY17 results

January 2018

Analysts

Jamie Aitkenhead

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

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

Eddie Stobart Logistics’ (ESL) H1 numbers, well trailed at the trading update in July, showed high levels of growth (13% revenues and 14% EBIT) consistent with management guidance and market expectations. New contract wins, which totalled £25m in the first half, were bolstered by organic growth in key business units. The iForce acquisition is integrating well, with the post-period acquisitions of Speedy Freight (announced at the trading update) and the remaining 50% of the Logistics People (announced yesterday) set to benefit earnings. Taken together, these growth drivers helped ESL achieve a slight increase in EBIT margin from 5.8% to 5.9%, which is well above other listed logistics firms. Also, H117 witnessed the announcement of the company’s maiden dividend of 1.4p. We increase our earnings and FY17 acquisition charge to reflect post-balance sheet events and nudge up our fair value to 203p.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

11/15

496.5

21.0

5.4

0.0

29.6

N/A

11/16

570.2

26.1

6.9

0.0

23.2

N/A

11/17e

648.2

41.4

10.8

5.4

14.8

3.4

11/18e

750.2

51.7

12.5

6.3

12.8

3.9

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

Contract wins plus M&A remain the drivers

We were reassured to see double-digit revenue and EBITDA expansion driven by the growth businesses of E-Commerce and Manufacturing, Industrial & Bulk (MIB), as well as £25m of new contract wins and contributions from the iForce acquisition. With two further acquisitions post-period, ESL is well-placed to deliver future growth. In short, we retain the view expressed in our initiation note, that ESL’s strategy of allocating capital to high-growth business units and maintaining margin discipline offers investors an attractive blend of growth and downside protection. Also of note also was ESL’s high cash conversion, with (company-defined) free cash flow as a percentage of EBITDA at 56% vs -19% in H116.

Underlying earnings forecasts tweaked upwards

We slightly increase our underlying revenue, EBITDA and EBIT growth forecasts to account for the acquisitions. Our 14% three-year revenue CAGR and 16% EBIT CAGR are attractive in a sector context. We have also increased the capex charge for the post-balance sheet acquisitions.

Valuation: Increased to 203p per share

The net effect of increased underlying earnings forecasts and increased acquisition costs results in a marginally increased fair value of 203p per share, which offers investors 27% upside to the current price. We continue to base our fair value on EVA and DCF methodologies.

H117 in line with expectations, FY17 looking strong

Under the current reporting system, Road Transport accounts for the majority of revenue and almost all EBITDA. In this context, 15% h-o-h EBITDA growth for Road Transport is very strong. E-Commerce and MIB, as well as acquisitions and new contracts, are the largest drivers behind group revenue growth. Given the strong growth already delivered in E-Commerce plus the impact of acquisitions, we are confident of a strong H2 during the peak E-Commerce season.

Exhibit 1: Divisional analysis

Revenues

 

H116

H117

% change

Road Transport

191.6

199.3

4

CL & Warehousing

45.5

49.1

8

EU Transport

18.8

19.9

6

Other divisions, central and eliminations

10.5

18.5

76

Total reported

266.4

286.8

8

Total less discontinued

253.6

286.8

13

Underlying EBITDA

 

Road Transport

16.3

18.7

15

CL & Warehousing

2.2

2.6

18

EU Transport

1.6

0.8

(50)

Other divisions, central and eliminations

(1.2)

(2.2)

83

Total reported

18.9

19.9

5

Total less discontinued

17.9

19.9

11

Underlying EBITDA margin

 

Road Transport

8.5%

9.4%

CL & Warehousing

4.8%

5.3%

EU Transport

8.5%

4.0%

Other divisions, central and eliminations

-11.4%

-11.9%

Total reported

7.1%

6.9%

Source: Eddie Stobart logistics, Edison Investment Research

Management has indicated that it may change its reporting segments to be consistent with its key end-markets, as shown in Exhibit 2. As can be seen, in keeping with management guidance, MIB and E-Commerce are providing the bulk of revenue growth. For now there is no margin information given for each of these segments. However, we note that, excluding the effect of discontinued businesses, each segment is growing in absolute terms and well ahead of the end-market growth rate. Retail, for instance, grew at 10% (versus the -5% reported) excluding discontinued businesses while E-Commerce grew at 51%, not 42% as reported at headline level, which is impressive, especially considering there was only a one-month benefit from iForce.

Exhibit 2: Divisional revenue split by end-market

Revenues

 

H116

H117

% change

Retail

84.2

80.0

(5)

Consumer

71.4

74.7

5

MIB

66.3

80.9

22

E-Commerce

26.0

36.9

42

Non-sector specific

18.5

14.3

(23)

Total

266.4

286.8

8

Total less discontinued

253.6

286.8

13

Source: Eddie Stobart logistics, Edison Investment Research

Financials and forecasts

We have nudged up our earnings forecasts from FY18 to reflect full year contributions from the Speedy Freight and the Logistics People (TLP) acquisitions. We have also added the acquisition costs for both, which increases our net debt forecasts. We have added a £6m exceptional refinancing charge, accounted for in net interest. This comes on top of several non-recurring exceptional items already included in our forecast, which includes restructuring and listing charges from earlier in the year. A summary of all of our earnings changes in included in Exhibit 3.

Exhibit 3: Earnings forecast changes

£m

2017e

2018e

New revenues

648

750

Old revenues

648

742

+/- New vs old

0.0%

1.1%

New EBITDA

55.7

65.3

Old EBITDA

55.7

64.4

+/- New vs old

0.0%

1.4%

New EPS (p)

10.8

12.5

Old EPS

10.9

12.3

+/- New vs old

-1.3%

1.8%

New DPS (p)

5.4

6.3

Old DPS

5.5

6.2

+/- New vs old

-1.3%

1.8%

New capex & acquisitions

(53.6)

(7.0)

Old Capex & acquisitions

(52.5)

(7.0)

+/- New vs old

2.0%

0.0%

New net debt

90.3

78.1

Old net debt

79.1

66.9

+/- New vs old

14.2%

16.8%

Source: Edison Investment Research

Valuation

We increase our valuation slightly to 203p. This is based on an average of a DCF (WACC 7.3%, terminal growth 1%) of 200.5p and an EVA analysis, which implies 206.3p.

Exhibit 4: DCF model

DCF valuation

£m

p/share

 

 

 

 

EV (£m)

807.9

225.7

FY17e net debt (£m)

90.3

15.9

Current number of shares (m)

357.9

Fair value (£m)

717.7

200.5

Current market cap (£m)

569.1

159.0

Upside/(downside) (%)

26.1%

DCF

2017e

2018e

2019e

2020e

2021e

Terminal Value

EBIT

48.6

57.2

65.4

70.0

74.9

 

Less cash taxes

(2.8)

(6.8)

(8.2)

(8.7)

(9.4)

 

Tax rate

5.7%

11.9%

12.5%

12.5%

12.5%

 

NOPLAT

45.9

50.4

57.3

61.3

65.6

 

Working Capital

(12.7)

(11.9)

(15.1)

(15.9)

(16.7)

 

Add back depreciation

7.0

8.1

9.3

9.8

10.3

 

Less capex

(7.5)

(7.0)

(7.0)

(7.4)

(7.7)

 

Free cash flow

32.7

39.6

44.4

47.8

51.4

51.9

FCF growth

21.1%

12.1%

7.6%

7.6%

1.0%

WACC

7.3%

7.3%

7.3%

7.3%

7.3%

7.3%

Year

0.0

1.0

2.0

3.0

4.0

 

Discount factor

1.00

0.93

0.87

0.81

0.75

0.75

Discount cash flow

32.7

36.9

38.6

38.7

38.8

622.2

NPV

807.9

775.2

738.3

699.7

661.0

622.2

EV/EBITDA

14.5x

12.4x

10.8x

10.1x

9.5x

 

Source: Edison Investment Research. Note: Prices as at 31 August 2017.

As shown in Exhibit 5, ESL currently trades on 11.3x one-year forward EV/EBIT and 12.7x one-year forward P/E. We believe that the stock should trade above these levels based on its high growth trajectory.

Exhibit 5: Market-implied multiples

Reverse valuations

 

FY17e

FY18e

FY19e

Market cap (£m)

569

569

569

Net debt (£m)

90

78

64

EV (£m)

659

647

634

EBIT (£m)

48.6

57.2

65.4

Market implied EV/EBIT

13.6x

11.3x

9.7x

Price per share (p)

159.0

159.0

159.0

Underlying earnings per share (p/share) (Edison definition, pre-amortisation)

10.80

12.55

14.50

P/E

14.7x

12.7x

11.0x

Source: Edison Investment Research

We use a one-year forward EVA calculation, which includes both the capital employed and adds back the lease expense. We include the fair value per share of 206p in our fair value calculation. As argued in our initiation, we believe this definition is prudent as it includes the operating lease liability and asset, as well as accounting for the lease cost as interest.

Exhibit 6: Economic value-added valuation

£m

2016

2017e

2018e

Simple ROCE calculation

Capital employed (total fixed assets incl amort + current assets - current liabilities)

288.3

327.7

336.1

NOPAT (underlying EBIT - tax)

40.7

45.9

50.4

ROCE (%)

14.1%

14.0%

15.0%

WACC (%)

7.3%

7.3%

7.3%

ROCE/WACC multiple (x)

1.9x

1.9x

2.1x

Net debt

165.5

90.3

78.1

Net debt/ EBITDA (x)

3.4x

1.6x

1.2x

EVA fair value (ROCE/WACC* capital employed - liabilities)

392.3

538.3

612.7

Fair value per share (pence per share)

150.4

171.2

Excluding intangibles ROCE calculation

Capital employed (total fixed assets incl amort + current assets - current liabilities)

288.3

327.7

336.1

Intangibles

219.3

209.8

200.3

Capital employed less intangibles

68.9

117.9

135.8

NOPAT (underlying EBIT - tax)

40.7

45.9

50.4

ROCE (%)

59.1%

38.9%

37.1%

WACC (%)

7.3%

7.3%

7.3%

ROCE/WACC multiple (x)

8.1x

5.3x

5.1x

Net debt

165.5

90.3

78.1

Net debt/ EBITDA (x)

3.4x

1.6x

1.2x

EVA fair value (ROCE/WACC* capital employed - liabilities)

392.3

538.3

612.7

Fair value per share (pence per share)

150.4

171.2

Including operating lease ROCE calculation

Capital employed (total fixed assets incl amort + current assets - current liabilities)

288.3

327.7

336.1

Intangibles

219.3

209.8

200.3

Operating lease liability

462.2

462.2

462.2

Capital employed less intangibles plus operating lease liability

531.1

580.1

598.0

NOPAT (underlying EBIT - tax)

40.7

45.9

50.4

Operating lease cost

71.5

72.0

72.0

EBIT pre operating lease cost

112.2

117.9

122.4

ROCE (%)

21.1%

20.3%

20.5%

WACC (%)

9.5%

9.5%

9.5%

ROCE/WACC multiple (x)

2.2x

2.1x

2.2x

Net debt (adjusted for £472m operating lease liability)

637.5

562.3

550.1

Net debt/ EBITDA (x)

5.3x

4.4x

4.0x

EVA fair value (ROCE/WACC* capital employed - liabilities)

543.6

678.5

738.5

Fair value per share (pence per share)

189.6

206.3

Source: Edison Investment Research, Note: *Return on capital employed (ROCE) divided by the weighted average cost of capital (WACC).

Exhibit 7: Financial summary

£m

2015

2016

2017e

2018e

2019e

Year-end 30 November

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

496.5

570.2

648.2

750.2

844.5

EBITDA

 

 

44.5

48.2

55.7

65.3

74.7

Operating Profit (before amort. and except.)

 

37.7

42.0

48.6

57.2

65.4

Intangible Amortisation

(9.5)

(9.5)

(9.5)

(9.5)

(9.5)

Exceptionals

(3.1)

(2.4)

(15.0)

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

25.1

30.1

24.1

47.7

55.9

Net Interest

(16.7)

(16.0)

(7.2)

(5.5)

(5.3)

Profit Before Tax (norm)

 

 

21.0

26.1

41.4

51.7

60.1

Profit Before Tax (FRS 3)

 

 

8.5

14.1

16.9

42.2

50.6

Tax

(1.6)

(1.3)

(2.8)

(6.8)

(8.2)

Profit After Tax (norm)

19.4

24.7

38.7

44.9

51.9

Profit After Tax (FRS 3)

6.8

12.8

14.1

35.4

42.4

Minority interest

0.0

0.0

0.9

1.3

3.2

Net Income (norm)

19.4

24.7

39.5

46.2

55.1

Net Income (FRS 3)

6.9

12.8

15.0

36.7

45.6

Average Number of Shares Outstanding (m)

357.9

357.9

357.9

357.9

357.9

EPS (pence per share) - normalised

 

 

5.4

6.9

10.8

12.5

14.5

EPS (pence per share) - normalised and fully diluted

 

5.4

6.9

10.8

12.5

14.5

EPS (pence per share) - (IFRS)

 

 

1.9

3.6

4.0

9.9

11.8

Dividend per share (pence per share)

0.0

0.0

5.4

6.3

7.3

EBITDA Margin (%)

9.0

8.4

8.6

8.7

8.9

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

7.6

7.4

7.5

7.6

7.7

BALANCE SHEET

Fixed Assets

 

 

262.7

258.1

295.1

284.5

272.7

Intangible Assets

225.5

219.3

209.8

200.3

190.8

Tangible Assets

36.8

37.9

84.4

83.3

81.0

Investments

0.4

0.9

0.9

0.9

0.9

Other

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

120.9

150.3

167.6

198.1

228.3

Stocks

1.9

2.4

2.7

3.1

3.5

Debtors

114.9

133.8

145.6

168.5

189.7

Cash

4.1

14.1

19.3

26.5

35.1

Current Liabilities

 

 

(109.7)

(120.1)

(135.1)

(146.5)

(153.0)

Creditors

(99.6)

(110.6)

(125.5)

(137.0)

(143.4)

Short term borrowings

(5.5)

(6.2)

(6.2)

(6.2)

(6.2)

Other

(4.5)

(3.3)

(3.3)

(3.3)

(3.3)

Long Term Liabilities

 

 

(197.2)

(198.8)

(113.3)

(108.3)

(103.3)

Long term borrowings

(168.5)

(173.4)

(103.4)

(98.4)

(93.4)

Employee benefits

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(28.7)

(25.5)

(10.0)

(10.0)

(10.0)

Net Assets

 

 

76.8

89.4

214.3

227.8

244.7

CASH FLOW

Operating Cash Flow

 

 

32.7

29.7

28.0

53.5

59.6

Net Interest

(12.8)

(10.3)

(7.2)

(5.5)

(5.3)

Tax

(3.9)

(1.7)

(2.8)

(6.8)

(8.2)

Capex

(7.7)

(8.1)

(7.5)

(7.0)

(7.0)

Acquisitions/disposals

18.7

5.5

(46.1)

0.0

0.0

Financing

0.5

0.0

117.1

0.5

0.5

Dividends

0.0

0.0

(6.4)

(22.5)

(25.9)

Net Cash Flow

27.6

15.2

75.2

12.2

13.6

Opening net debt/(cash)

 

 

191.4

169.9

165.5

90.3

78.1

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(6.1)

(10.8)

0.0

(0.0)

(0.0)

Closing net debt/(cash)

 

 

169.9

165.5

90.3

78.1

64.5

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Eddie Stobart Logistics and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Industrials

Nabaltec — Record H117 performance; guidance raised

Nabaltec achieved strong earnings growth in H117, despite the drag on revenue growth and margins caused by the temporary shutdown of the US production facility, Nashtec, in August 2016 when its main supplier (and JV partner) went into administration. Management secured the outstanding stake in Nashtec in March 2017, enabling it to move forward with plans to re-open an enlarged facility in Q118. This will enable Nabaltec to benefit from growth in demand in Europe driven by tightening safety regulations.

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