CTI's bump in the road

The Perth-based transport and logistics group is still solid.

The approximate 20% share price sell-down in CTI Logistics’ (CLX) shares last week, from $2.44 to $2, after the company’s latest half-year result presents a strong buying opportunity.

The result was in line with expectations and, contrary to the market share price reaction; I believe the company is well placed for medium-term growth.

The potential reasons for the sell-off include confusion regarding one-off items and management commentary about the effects from “the end of the resources boom”.

With broker presentations next week, and a corresponding announcement to the market, the company’s positive medium-term outlook is likely to be clarified. I first wrote about CLX in late December in CTI’s road to expansion.

CTI Logistics (CLX)

1H 2014 

1H 2013

% Change

Revenue

$'000

73,833

62,927

17.3%

EBITDA

$'000

16,286

11,246

44.8%

EBIT

$'000

10,139

9,689

4.6%

PBT

$'000

9,164

8,927

2.7%

NPAT (reported)

$'000

6,698

6,147

9.0%

NPAT (adjusted)

$'000

6,256

6,147

1.8%

Ave shares on Issue

mn

62.6

59.1

5.9%

EPS (adjusted)

c

10

10.4

-3.8%

Interim DPS

c

4

3.5

14.3%

Franking

%

100

100

Adjusted profit

The important detail from the table above is that underlying net profit after tax increased 1.8% to $6.26 million. This adjusts for the one-off network expansion cost (associated with establishing a new regional network) that was expensed, and the sale of an investment property in Perth, and a write-down on two separate properties. The network expansion cost was $1.25 million (pre-tax), the property sale book profit was $2.92 million (no tax), and the non-cash impairment write-down was $1.6 million.

Property adjustments

CLX has significant hidden value within its property assets. The market most likely viewed the $1.6 million impairment write-down on two properties as a negative. However, it would appear management has capitalised on some market weakness (forced sales nearby) to revalue (write-down) some of its property and offset against the profits made on the divested investment property for tax purposes. 

It needs to be highlighted that if all its property assets were revalued to market value there would be a large increase to the overall book value. Many land assets are held on the balance sheet at cost value, despite market values been considerably higher.

Land and Property Assets

Valuation as at 30/6/13

Book value at 30/6/13

$m

$m

Current assets

62.99

36.18

Non-current assets

15.74

9.78

Adjustment 1H14

-5.10

-5.1

Total

73.63

40.86

Value per share

$1.14

$0.63

The table above shows the large discrepancy between the book value and market value. Part of this value will be realised as management considers the sale, or sale and lease-back, of assets.

Potential Sale Value of land and Property

Director valuation (at 30/6/13)

$m

78.7

Book value

$m

46

Estimated Tax losses

$m

-16.4

Taxable gain

$m

16.4

Tax on gain

$m

-4.9

Transaction costs

$m

-4

Sale in 1H14

$m

-3.5

Impairment write-down 1H14

$m

-1.6

After tax value of property

$m

64.7

Value per share

$1.00

This table displays the potential sale value after considering tax and transaction costs.

Mining exposure

The company’s direct exposure to mining is very small, with its major resources exposure being liquefied natural gas projects. Management also has an excellent track record of managing its business through changing market conditions.

The LNG opportunity currently includes Gorgon in Western Australia, with Wheatstone to begin shortly. Gorgon will go until 2015, and if there is development of additional LNG processing trains there will be more work for the company.

During the GFC earnings remained flat, whilst those of most competitors rapidly declined. We believe the company is well placed to adjust to the transitioning WA economy that is moving from a resources capital expenditure boom to production volume growth.

Certainly, the secondary effects of a weaker economy do impact the business. But this needs to be taken in context. When management discuss that their business is being affected by the “end of the resources boom”, they mean that the company’s earnings will grow by single-digit earnings growth rather than the usual double-digit growth in the short term.

Parcel delivery

CTI has approximately 40% market share of the parcel delivery network in Perth. The structural shift in retail sales to online will underpin growth, increasing the percentage of this division’s contribution to CLX group earnings to above the current 10%.

Warehouse development – Hazelmere site (near Perth Airport)

The warehousing operations include Distribution centres, outsourced and overflow DC services for Target, Mitre 10, Godfreys and others. Consumer discretionary spending and retail sales are the main operational earnings drivers.

In regards to the Hazelmere site expansion; this was completed as key customers were desperate for CLX to provide further assistance for their business. For example, Target prefers to outsource its distribution centre management to CLX for both improved reliability and efficiency, and also to free up capital for other parts of its business. With the expansion nearly complete, and an additional 20% capacity, there will be an earnings benefit from the fourth quarter of this financial year.

Growth initiatives/strategy

Whilst the operating environment is currently weak, it can be clearly seen that the company is well positioned for growth through the Hazelmere site expansion, LNG projects, and hidden land value.

The reason this stock has been one of the best performed stocks on the ASX for many years is because of management’s ability to be flexible enough to meet individual customer demands. With a diversified customer base, management also has focused on cross-selling additional revenue streams to its existing client base.

In its courier business, management mainly uses sub-contractors, and hence the small amount of fixed costs means there is not an issue of unutilised assets when the market is weak.

Sector comparison

CLX is now trading at a material discount to logistics and transport comparable as seen in the table below.

Comparables

Share Price

EV/EBITDA

EV/EBITDA

PE

PE

FY14

 FY15

FY14

FY15

CTI Logistics (CLX)

$2.00

7.7

6.9

12.3

10.9

K S Corporation (KSC)

$1.78

4.6

4.2

13.8

10.8

Qube Logistics (QUB)

$2.07

11.7

10.6

21.5

19

Toll Holdings (TOL)

$5.61

7.5

7.2

14.1

13.4

Asciano (AIO)

$5.53

8.2

7.7

14.8

13.7

Average

7.9

7.3

15.3

13.6

If the land value and related rental earnings are stripped out, then the discount to comparables in the sector becomes far greater.

Earnings Forecasts

CLX - $2.00

FY13

FY14

FY15

FY16

Revenue

$m

126.7

139.3

153.3

168.6

EBITDA

$m

19.4

20.9

23.4

26.2

EBIT

$m

15.9

16.7

18.7

21.0

NPAT

$m

9.8

10.5

11.9

13.5

EPS

cps

15.2

16.2

18.3

20.9

DPS

cps

7.5

8

8

8.5

P/E ratio

x

13.2

12.3

10.9

9.6

Dividend Yield

%

3.8%

4%

4%

4.3%

EV/EBITDA

x

8.3

7.7

6.9

6.2

Summary

I maintain my outperform recommendation with a slightly reduced $2.70 sum-of-parts valuation. The catalysts that may remove the discount to valuation over the next six months include – a management broker presentation next week, completion of the Hazelmere site expansion, further land sales, and additional work for the Wheatstone LNG project.