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“We are committed to continuously reinventing ourselves for the benefit of our customers”, says Frank Appel in Deutsche ...
When CH Robinson announced its fourth-quarter and annual results at the end of January, a key section of its 8-K form grabbed my attention.
It read: “Commencing with this quarter, we are now reporting operating results based on three reportable segments … North American Surface Transportation (NAST), Global Forwarding and Robinson Fresh.”
News that might pass unnoticed in any other environment, in corporate finance it often captures the imagination of corporate raiders and turnaround specialists, many of whom have not been shy in private conversations when it came to speculating that “something might be brewing” in Eden Prairie, Minnesota, where CH Robinson is headquartered.
This being my bread and butter, I had no choice but to explore whether its recent re-organisation is the prelude to a wider, more comprehensive corporate restructuring.
Although I reiterate the view that a big merger deal could be a more appealing outcome for its shareholders, I also had to check whether the numbers would add up, should it be readying for a break-up into up to three separate, independent entities.
Gimmicks and M&A
Possible financial gimmicks aside, investors are looking for signs that change is on the cards. Despite years during which they have been decently rewarded in terms of all-in returns, CHR’s corporate strategy has failed to fully satisfy them, given the unexpressed potential of the group.
So, with its stock trading at multi-year highs of $80.1, is it the right time to look into the crystal ball?
As a reference, the financials of its three main units are shown in the table below, and if you are attracted to the idea of stripping out global forwarding activities from the reminder of the portfolio, you are probably in good company – and that might be the most reasonable scenario on paper.
Reached via email, the IR department of CH Robinson would not comment on whether this announcement “might open the door to unexpected extraordinary corporate activity [namely, split-offs]”, which I hinted at as a possibility following talks with my banking sources.
In a call with analysts on 1 February, chief executive John Wiehoff argued that “one of a lot of reasons why we wanted to evolve our financial information into the segment reporting is because it is reflective of how today we’re thinking about our capital allocation, and that includes M&A exploration.”
He added: “We’ve also stated, and remain comfortable, that we could take on another billion or two of debt, depending upon what it is that we’re acquiring and where we go. So, we do have some more opportunity to deploy capital there as well.”
This comes as its core truckload brokerage business is under significant pressure, as the table below shows, with net revenues down 4.5% year-on-year.
With $8.7bn of gross turnover and $1.5bn in net sales, NAST is indisputably the beating heart of CH Robinson, and generates $674m of operating income.
Adding non-cash items to its operating income line, Ebitda comes in at about $700m. Given a 7.9% Ebitda margin on gross revenues, and little prospects of organic growth, a multiple of up to 12x could be appropriate for the entire division, yielding an enterprise value of $8.4bn, or about 70% of CH Robinson’s current enterprise value.
Recent quarterly figures through to 1Q17 confirmed volume gains were offset by “margin compression”, with strong headcount growth figures playing unfavourably here.
“We continue to believe that the strength and experience of our team is a competitive advantage,” Mr Wiehoff insisted.
The lower margin of its global forwarding unit was recently mitigated by extraordinary corporate activity, where M&A was responsible for higher growth rates, although growth itself remains a problem across most of its divisions, including Fresh.
Given its much smaller size and a few other factors, global forwarding on a standalone basis will unlikely fetch a top valuation in its current form, and when a bull-case scenario is also assumed for the Fresh unit, it appears evident that a fully fledged break-up of CH Robinson might end up being a terrible idea, even before so-called dis-synergies are estimated.
As our team reported at the end of 2016, “the company typically has a large number of long-term contracts with shippers across its different business sectors – and in land, ocean and air freight corridors – and Mr Wiehoff maintained that the practice of securing customers on longer-term contracts was the right strategy for the company”.
This is a story where the whole could easily be worth more than the parts.
Perhaps, then, accountability is what CH Robinson is after via a soft re-organisation, I mused, which makes a lot of sense in a business cycle where large, diversified logistics companies are struggling to generate surging returns on capital employed against budgeted costs, while focusing on investment in technology.
“The themes around technology will include enhancements in supply chain visibility, as well as gathering more and more analytical data that we can use for our own benefit, as well as our customers, and, lastly, improving and automating our processes along our digital strategies to make sure that we’re transforming our networks and staying current in the marketplace,” the boss reiterated.
Mr Wiehoff added that the decision to add segment reporting “is largely based on the accumulation of changes that have occurred in recent years”.
“We’ve invested to expand our services and diversify our business and have also made structural changes to align executive oversight to the business,” he added.
“In late 2016, we made changes to our internal financial information that we used to make decisions, including the allocation of our shared cost to the key business segments”, which should help it boost flattish returns.
Although CH Robinson is a very healthy company with a rock-solid balance sheet, its core operating cash flow fell 26% to $529m – mainly due to a material change in receivables, which impacted short-term liquidity by about $130m – and its core free cash flow yield dropped significantly to 3.8% year-on-year in 2016.
Inevitably, net repurchases of common stock slowed down, falling to $190m from $225m a year earlier, while cash layouts from dividends were only marginally lower year-on-year, based on a lower share count.
These are all good signs in terms of capital allocation, but whether it is enough to further push up its frothy valuation, my crystal ball wouldn’t say.