Shares in logistics specialist Xpediator (LON:XPD) today took a large fall as a trading update revealed that a whole host of factors would see profits materially affected despite revenue targets being hit. This has come as a bit of a surprise, as only two months previously another update did not reveal any problems.
Xpediator shares have only been trading since the middle of 2017, so it may be easy to dismiss this as yet another IPO failure. However, the share price still sits ahead of the initial offering price despite this large fall.
Xpediator are a small company, but definitely one for the times. With e-commerce still growing, it is not a bad time to be involved in freight management if it can be done profitably, and Xpediator provide logistical services, warehousing and transport services. Rather than be full-on delivery point-to-point company, Xpediator are a step back from this, taking over only part of the journey such as in sea freight. And there is plenty of business to be had here, as growth in turnover has been impressive, growing fivefold from 2014 aided by acquisitions.
The warning comes in a morning RNS. We get straight to the point:
Due to a number of factors summarised below, while the business is on course to meet market expectations for revenues in the current year of over £200 million, profit before tax is anticipated to be materially below market expectations.
These expectations are not quantified in the trading statement, but a broker note (available on Research Tree) puts this figure at £6.9m. A ‘material’ figure could really be quite wide.
The reasons are quite varied, including:
- New customer contracts involve upgrading warehouse: interim loss of business
- New business EShopWeDrop generating lower volumes
- Turnover in Regional Express division lower as management attention focused on larger deals
- Investment in infrastructure
- Preparations for no-deal Brexit
It may be refreshing to read a detailed thorough disclosure, alternatively some investors may be miffed that there are so many things wrong.
It may be pleasing to know that Xpediator appear to be a tightly run company. The large increase in growth has been driven by acquisitions, but at the same time these acquisitions have not been funded by debt, instead using cash resources cashflow from existing businesses as well as issuing equity.
The business has also been consistently profitable since its listing and capitalises only a small amount of costs. Shareholders have enjoyed a decent appreciation in their share price, as well as in recent years, a dividend. With an emphasis on todays note stressing the need for funds to upgrade facilities, I do believe this should be pulled, or reduced. The projected dividend for the next year equates to almost £2m leaving the company, which should have a better rate of return if indeed improving facilities allows higher margin customers to be serviced.
An encouraging thing is that the share is heavily owned by its directors. The CEO owns over a quarter, and the previous CFO had around 3%. In fact, the free-float of the shares seem pretty small as there are many heavy holders.
The types of acquisitions seems sensible, albeit not transformational, typically smaller freight forwarding companies with current good relations with clients. The bear case surrounding this is that these businesses tend not to have very large differentiating features, with many advantages simply being in current customer agreements and/or operations close to hubs of business. Logistics still appears to be a relatively fragmented operation, with many different smaller players competing with bigger ones. But perhaps the margins are a clue to that: it is not something that is lucrative.
The bull case is that across Europe, there must be hundreds, if not thousands of opportunities and there may be cities/markets where facilities are under-served. A company operating across Europe may also have synergies which provide benefits over smaller players. The cushioning factor is the cash generation of the existing business.
It should be noted that balance sheet wise, protection is fairly thin. Asset-wise, it is relatively light with most of its assets being receivables. Net Tangible Asset Value comes out at £3.6m, as the acquisitions have seen goodwill and intangibles rise to over £25m. Whilst the cash balance should offer some protection, it should be noted that this sector may be one of the heaviest hit by Brexit, in the worst case seeing shipments tied up in red tape.
This is quite an interesting profit warning, which on one hand gives some clarity to proceedings, but on the other hand takes it away by not clarifying numbers. A material hit to the profits may be quite difficult to have a stab at now, and considering the major uncertainties in future any forecasts in profits would be subject to some large variance. Brexit may not disrupt business at all, or it could lead to big problems. Whichever it is, there will still be a demand to ship goods from one place to another.
Perhaps if this was a technology share, the market may be more enamoured with it. But the share was not particularly expensive before the warning, and it has now gotten quite a bit cheaper. With the level of competition around in this sector it may not be possible to ever deliver exciting margins, although this doesn’t mean that this becomes a poor investment. Management are heavily invested, and also have a good track record.
Gut feeling says to me that there is no real advantage to going in now; it feels fairly valued, and Brexit uncertainties might deliver a better price. 3/5.