Analysis: to IPO or not to IPO, that is the question for CMA CGM
What comes next for CMA CGM? I asked my sources, following a formidable trading update ...
As the old saying goes, “not all that glisters is gold” – and that, in my view, also applies to Eddie Stobart Logistics.
A couple of statements from the British haulier drew my attention earlier this year, at its initial public offering (IPO).
Firstly, when it launched its IPO on 19 April, the group (previously “Eddie Stobart”) said it was “actively assessing opportunities to broaden and enhance its capabilities and accelerate its growth profile through targeted acquisitions”.
“The directors,” it continued, “believe there are opportunities to pursue acquisitions which would enhance Eddie Stobart’s core offering, and the board is currently in discussions with a number of potential targets.”
(Full details of its latest iForce deal and acquisition plans can be found on page 18 and page 32 of the “Place and Admission to AIM” filing.)
Secondly, chief executive Alex Laffey added, in a statement on 25 April: “The completion of the IPO process is a key milestone (…) we are excited to begin this new period as an independent company with the appropriate capital structure to take advantage of growth opportunities in the supply chain and logistics market.
“We welcome our new shareholders and look forward with confidence to the next phase of our development as a listed company,” he concluded.
As it continues to seek growth in supply chain and logistics, where growth will be sought is just as important as how much Eddie Stobart Logistics could afford to pay to boost its £570m top-line.
So, is a deal of a certain size – say up to £100m – around the corner?
There are reasons to believe urgency to act should be felt in the company’s Warrington headquarters – although meaningful acquisitions may have little to do with it, in my opinion.
Consider that even a relatively small cash deal, worth, say, £60m – which would value any target at about 10% of its own market cap – would stretch its capital structure further. In fact, any such acquisition funded by debt would likely push up pro-forma net leverage to about 4x from 3.4x on a trailing basis, even assuming 5-10% earnings accretion at operating level, according to my calculations.
On the face of it, that is a demanding relative indebtedness ratio based on its underlying profitability.
Alternatively, it is possible the group could decide to use stock to fund a purchase and de-lever, given that its stock continues to trade at a premium against fair value, based on several metrics.
The £45m purchase of iForce has been partly funded by new equity – but the question remains: is growth the ultimate answer? I have mixed feelings on this matter. To start with, ebitda margins and trends by unit are shown in the table below.
Between 2014 and 2016, cash flow profitability fell, mainly due to some non-core adjustments, although, even excluding those adjustments, the ebitda margin would be lower last year than in the previous two years.
Meanwhile revenues grew, comfortably outstripping the compound annual growth rate of cost of sales during the period, which showed good financial discipline in dealing with third parties.
Encouragingly, too, the ebitda margin of its core transport unit has risen 40 basis points since the end of 2014 – but there is a caveat.
Its smaller “CL and Warehousing” unit was a drag on profitability, and that is a business where it may be harder to generate the kind of returns that justify the unit’s cost of capital, given its current size among other things.
Typically, an ancillary business to core haulage activities, contract logistics and warehousing operations is an essential part of the offering mix to clients, and that is one of the reasons why it agreed to acquire a company such as iForce – a multi-channel retail logistics and supply chain management group servicing the fulfilment requirements of retailers. Its “primary revenue streams include provision of warehousing, fulfilment and carriage management, returns processing and stock clearance, as well as related software solutions”.
The acquisition hasn’t moved the valuation needle, though.
Meanwhile, its core operating cash flows might continue to need support from M&A to bounce back.
Importantly, its £570m market cap is virtually unchanged since it listed two months ago. Why?
For one thing, it is possible investors do not find its relatively small free float enticing, as testified by a lowly average volume of traded stock so far. Essentially, its stock is highly illiquid, which doesn’t bode well with equity-funded M&A at present.
Then, cash and equivalents were up to £14m at the end of fiscal 2016, ending on 30 November, so bolt-on deals are possible, particularly if its equity becomes more appealing in future – but large M&A is out of question, especially given its ambitious dividend policy.
It recently noted that “the first dividend payment post-admission is expected to be a final dividend in respect of the year ended 30 November 2017 (…). However, the board will consider paying an interim dividend following the publication of its interim results, (and) is initially targeting a payout ratio of approximately 55% for FY17”.
Given its current price, a yield north of 1% is all shareholders can hope for, in my view.
I think it is fair to say that its public market debut has been underwhelming, although it has contributed to boost the stock of holding company Stobart Group, which currently retains a stake of 12.5% in Eddie Stobart Logistics, having reduced exposure in its subsidiary since the end of 2014 in order to pay down outstanding debts.
“In April 2017, we realised £113.3m of cash following the IPO of Eddie Stobart Logistics and retained a 12.5% shareholding in the AIM-listed business which was valued at £71.5m on flotation,” Stobart Group said earlier this year.
This is something Eddie Stobart afficionados may be pleased to hear, but it remains to be proved that the company can grow more profitably while keeping leverage at bay in a market where organic growth prospects remain mixed – in my opinion.
“The directors have identified a rolling pipeline of potential new business with an aggregate value of £450-500m, comprising £96m in e-commerce, £187m in MIB, £88m in retail and £78m in consumer, with the balance being made up of European and specialist operations,” it said earlier this year.
Good luck to them.