Eddie Stobart Logistics (ESL)


Stockwatch: Woodford's still buying this AIM share

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Stockwatch: Woodford's still buying this AIM share

What's most vital, industry structural change, or the wider environment? Management of AIM-listed logistics group Eddie Stobart (ESL)  - mainly known for the iconic Eddie Stobart lorries, but also involving warehouses - says it is well-placed to capitalise on expansion of courier and same-day delivery, linked to e-commerce.

Yet a 20% plunge in its stock this year, just like for ex-parent Mid 250-listed Stobart Group, reflects wariness of small to mid-cap firms mainly geared to the UK economy.

Cynics would say that's just what to expect: cyclicals being sold ahead of a downturn, just like they rise in the trough of a recession despite poor results. Weighing up the current spate of share price falls is thus inherently quite speculative in terms of a macro view.

Woodford is down 20% on his £110 million stake

When I drew attention last September to the spin-off from Stobart Group, "Logistics" was trading the same as its 160p placing price and appeared quite well supported by a 4% prospective yield (based on consensus for a 6.5p dividend in respect of 2018), and "as acquisitions get integrated and synergies kick in, there looks scope for this side to turn up smartly in the longer run."

Did I fall into a value trap, along with Neil Woodford who invested £110 million?

A 5% yield might now be providing support with the price down at 125p, after strong annual results to end-November 2017 and an expressly robust outlook. The stock appeared to find a floor at 123p prior to these 10 April results although its response has been muted. The crux question is whether structural change towards e-commerce means well-placed logistics groups can defy economic risks linked to Brexit and higher interest rates.

Final results reflect positive fundamentals

The outcome of annual results is said to be in line with expectations, if helped by acquisitions: a 57.5% leap in adjusted pre-tax profit to £37.8 million on revenue up 13.6% to £624 million, with operating profit up 17.4% to £48.5 million.

A total 5.5p dividend represents 1.8 times earnings cover, but cost nearly £20 million, in context of adjusted free cash flow up a modest 4.2% to £30 million.

Cash flow can vary, but mind how that's more like 1.5 times cover for the dividend and there'll be other financial demands/sources before the board can determine an appropriate payout.

The narrative is bullish: healthy renewals and new contracts, warehouse capacity up 17% and three acquisitions broadening capabilities.

There is no caution expressed with regard to trading momentum or being affected by Brexit. The new financial year is said to have started well, with confidence of further growth as "we continue to see encouraging trends in all sectors with new and existing customers considering outsourcing, so that they can concentrate on their core operations and customer offerings."

Ongoing consolidation in logistics is said to offer further opportunities for growth. Stobart is proclaiming a blue sky compared to mixed outlooks in various other industries; and you take your view as to whether that holds on a 1-2 year view.

Two-thirds of business is road transport

Revenue comprises 66.4% road transport, 22.4% contract logistics & warehousing, 6.2% EU transport and 5% other activities.

As yet, three of Stobart's four market sectors have seen strong growth, its main one being Manufacturing, Industrial & Business with revenue up 37% £182 million, reflecting the full effect of 2016 contract wins plus organic growth.

Retail-related is up 11% to £169 million, serving most major UK retailers, if admittedly "a mature market".

Consumer has slipped 12% to £145 million, blamed on the loss of one material contract now re-secured. E-commerce, fourth in size but the most rapidly-growing, has jumped 111% to £103 million amid 30% like-for-like growth (is my calculation) after subtracting the April 2017 acquisition of iForce which contributed £39.6 million sales and £2.8 million normalised operating profit from end-April (when acquired) to end-November.

A 50% "controlling interest" in Speedy Freight has added a same day business-to-business freight service, and both acquisitions are said to offer cross-selling opportunities within the group. Management also aims to transfer its approach to the continent, described as a growth prospect if likely to depend on how UK/EU trade talks conclude.

Eddie Stobart Logistics - financial summary         Estimates
year ended 30 Nov 2014 2015 2016 2017 2018
Turnover (£ million) 347 497 570 624  
IFRS3 pre-tax profit (£m) 6.6 6.1 11.2 9.9  
Normalised pre-tax profit (£m) 6.6 8.1 24.0 37.8 41.9
Operating margin (%) 4.5 4.6 4.7 4.3  
IFRS3 earnings/share (p) 1.3 1.3 3.3 1.2  
Normalised earnings/share (p) 1.3 1.5 7.9 9.8 12.5
Earnings per share growth (%)   14.0 127 197 27.6
Price/earnings multiple (x)       12.8 10.0
Cash flow/share (p) 8.5 7.7 4.9    
Dividend per share (p)       5.8 6.5
Dividend yield (%)       4.6 5.2
Covered by earnings (x)       1.7 1.9

Source: Company REFS                  Past performance is not a guide to future performance

Brokers' forecasts may have wavered

When I drew attention last September the consensus was for £51.9 million normalised pre-tax profit in 2018, which, according to Company REFS, had dropped to £41.9 million as of 22 February, although the earnings per share (EPS) trim is only from 12.7p to 12.5p.

I would not get hung up on a sense of downgrade: effectively the stock is on about 10 times forward earnings according to what's presently known, yielding over 5%.

This should be supportive, assuming the narrative remains firm. Woodford appears to think so: on 10 April his investment management firm raised its stake from 21.5% to 22.2%, which either demonstrates conviction a focused holding is worth the risk, despite effectively being locked in, or he has too much money to deploy.

I tend to agree, adding stock looks appropriate, and it will be interesting to see if any directors do likewise.

Fair balance sheet if intangibles-heavy

It's mixed in parts: intangible assets and goodwill represent 128% of net assets, although net debt has reduced 34% to £109.5 million for gearing of 51.6%.

Last year's debt service charge was £9.65 million versus £31 million operating profit, so, yes, management ideally needs to keep reducing debt otherwise higher interest rates and a trading downturn would hurt the shares further.

End-November cash of £11.9 million implies scope for another bolt-on acquisition though is no war chest, especially if the board opts to prioritise further debt reduction.

More positively, the ratio of trade receivables to trade payables is 1.16 times, as if Stobart treats its creditors fairly well and profits are not being enhanced by delayed payments.

It would help to see acquisitions' deferred considerations better clarified; while mentioned in the narrative they don't appear quantified e.g. as a contingent liability.

With hindsight, perhaps I should have been more cautious of a logistics group floating potentially late-stage in the cycle; that a 4% yield was robust enough support.

Yet this is a well-managed, essential services operation with a strong market position and reputation.

Within Stobart Group it helped that stock treble from 2015. Obviously, the future is what counts and sentiment isn't likely to improve quickly; so if you are cautious on the economy then maybe bide your time, or continue to hold.

Woodford's move to buy when this stock is down is overall the right approach though, so I'd conclude positively: Add.

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