PHOTO GEFCO

The public market listings of German ocean carrier Hapag-Lloyd and Swiss 3PL Ceva Logistics were the biggest initial public offering highlights of the past five years in the supply chain sector, yet the upcoming IPO of France’s Gefco could overshadow both, if the price is right.

Key to the success of the deal – announced just before Christmas, and likely to launch in the first quarter, if volatility subsides – is the amount of profitable growth Gefco will be able to achieve in the medium term, in a late cycle that could be unforgiving, as proved by the correction of most risky asset prices globally last month, when logistics was one of the worst-performing sectors globally.

Value

To start with, Gefco is intrinsically less cyclical than Hapag-Lloyd, and its balance sheet much stronger than those of the German carrier and Ceva.

Net leverage is not calculated for the last 12 months ended 30 September 2018, Gefco said in the prospectus, due to the impact of new IFRS 16 rules, mainly concerning off-balance sheet items, such as leases – which means that recurring ebitda for “the three months ended 31 December 2017 cannot be determined”.

But on a 12-month trailing/forward basis, it is safe to assume that net leverage could hover around 1.1x/1.2x, or about one-third and one-fourth, respectively, against comparable metrics for Hapag-Lloyd and Ceva – on an adjusted basis, as far as the latter is concerned. Hence, taking into account proceeds used to de-lever the balance sheet post-IPO.

Leverage (source Gefco)

Leverage (source Gefco)

Even assuming Gefco’s top-line flatlines to 2021 – and going with a typical discount rate, as gauged by its weighted average cost of capital, of between 6% and 8% – investors could be queuing to join a deal that has its obvious downside risk (today’s profit warning from Germany’s Continental should ring a warning bell), given the typical auto exposure of the its core business.

(Building on its historical core of automotive, the sectors served by the group also include humanitarian relief and pharmaceuticals, Gefco says)

Yet meaningful upside could be on the cards if it’s careful about the pricing at a time when its core shareholders, Peugeot and Russian Railways, look to trim exposure.

(Background for the reader: within the sectors it operates, “the group has obtained and grown key bluechip clients including BASF, United Technologies, Médecins Sans Frontières and Ferring Pharmaceuticals”, it says, adding that free capacity or backflows on certain automotive routes are utilised to provide non-automotive customers with capacity – such as those operating in industrial, aerospace and pharmaceutical business sectors)

How much?

If it maintains a constant ebitda margin of 7%, which is slightly above its implied IFRS 16-adjusted numbers, a mid-point valuation for the enterprise (EV), which includes net debt, comes in at €2.1bn, for an implied equity value of €1.8bn.

These findings are consistent with my estimated liquidation value, assuming a 2x multiple for its most liquid assets (mainly receivables). Based on the assumptions powering my model, the IPO range is €1.6bn-€2.1bn, which is based on zero growth, but also, crucially, doesn’t factor in the typical discount at IPO (that range implies discounted cash flows in the 6x/10x EV/ebitda range) to attract investors.

P&L headline numbers (source Gefco)

P&L headline numbers (source Gefco)

Stamp on Gefco a growth rate which is double that of western inflation (as a reference, see the table below), and the mid-point EV, based on constant multiples, rises to €2.35bn, assuming constant margins. Then, assume a rise in its clean ebitda margin to 9% – which is unheard of for similar businesses – and its EV surges to €3bn, excluding any IPO discount. Dreamland territory, if you ask me.

Like-for-like growth (source Gefco)

Like-for-like growth (source Gefco)

As it grows, it needs more working capital.

Ebitda, ebit and working capital (source Gefco)

Ebitda, ebit and working capital (source Gefco)

Barring strategic consideration, its main shareholders, Russian Railways – well known in the debt markets for being opportunistic in capital deployment and counter-party risk management – and Peugeot would unlikely want to forgo the opportunity of participating in meaningful upside, so anything materially higher than €2bn, in terms of EV, seems unlikely.

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Out of the IPO gate, Hapag-Lloyd was underwater for some time, while Ceva was bailed out by CMA CGM, thanks to the latter’s investment at IPO and the subsequent proposal to take it over, which made the unthinkable possible: Ceva has been by far the best performer in logistics in the past a couple of months, as its price continues to stick to IPO. Gefco, in my view, could mimic Ceva’s corporate story, given a paucity of available takeover targets.

Standalone, it could be an outlier, too, although automotive is under the spotlight due to massive layoffs and restructuring plans announced by the major original equipment manufacturers (OEMs) worldwide. Of course, given its breakdown by units, residual upside could stem from spin-offs, but one caveat is that without overland exposure, its other business lines are sub-scale.

League tables (source Transport Intelligence)

League tables (source Transport Intelligence)

A peculiar company – until 10 years ago, fully consolidated by Peugeot, which had to streamline its corporate structure after the ‘Great Crisis’ (from production to the end customer, PSA was a one-off in the auto industry as it used to own all its supply chain assets) – Gefco has never stood out as a particularly appealing asset.

Now, however, it is one worth watching closely.

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