CTI's long road to growth

CTI Logistics represents a good opportunity to long-term value investors, but don't expect any share price catalysts in a shorter time frame ... and there are better opportunities elsewhere.

CTI Logistics (CLX) was my first “buy” recommendation in Eureka Report, but unfortunately thus far it hasn’t gone to plan. At the initial recommendation the share price was $2.35, and in the nine months since the price has slowly drifted towards its current level of $1.84.

Although the full-year result was slightly weaker than anticipated, the 21% share price decline since my initial recommendation is more due to lack of a share price catalyst than any major structural issues. On a 2014-15 price-earnings multiple of 11 and a fully franked yield of 4.4% there is long-term value, and it is hard to see too much more downside.

Graph for CTI's long road to growth

Despite this long-term value the question for shareholders is whether there are better opportunities elsewhere due to the lack of visibility around the timing for growth.

With the slowdown in Western Australian mining capex work, the company has been transitioning away from resource projects and towards warehouse logistics and general freight.  At the first-half result, management flagged the tough market conditions which continue to place pressure on margins and revenue growth.

The management team has a strong track record of adapting to market conditions. This can be seen in the courier division where the fleet is mainly leased and therefore can adapt quickly to changes in demand.

In the property division, there is still hidden value. The book value of the group’s property is well below current market pricing.

The company has also positioned itself to take advantage of opportunities in the oil and gas sector. CLX has recently invested in increasing its state-wide transport and logistics network. Much of this investment is yet to flow through to earnings, but will enable the company to grow through the cycle.

There has also been significant investment in the Hazelmere warehousing capabilities, based near Perth Airport. There is high demand for CLX’s overflow distribution centre services. Large customers such as Target, Mitre 10, Godfreys and others have been waiting for increased capacity so CLX can handle more of their third-party distribution centre management. This investment in warehousing capabilities is likely to flow through to earnings over the next one to two years.

The actual direct mining exposure is very small. The major resources exposure is the LNG projects, particularly Gorgon and Wheatstone. The secondary effects of the mining slowdown have flowed to other areas of the business such as the courier delivery. But we have high confidence in management’s ability to transition the business through the changing environment, as they have done many times in the past.

Whilst operating conditions are a little flat, the asset value of CLX provides strong underlying support for a base case valuation. The group’s property portfolio is on the balance sheet at 60 cents per share, however, the market value after considering potential tax and transaction costs is closer to $1.00 per share.

For longer-term value investors I think CLX is a good opportunity. However, I am downgrading my recommendation from to “hold” from “buy” due to a lack of visibility around the timing of the company’s growth opportunities and share price catalysts. Near-term earnings downgrades have reduced my valuation to $2.30 from $2.70.

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