Transpacific counts the cost
Recommendation
Transpacific's share price has fallen 2% after announcing that grounding its fleet following a fatal crash involving one of its trucks (see Transpacific grounds its fleet from 20 Aug 14 (Buy – $0.93)) will cost around $20m. Truck repairs cost about $7m, with the rest due to 'ancillary matters, such as roadworthy inspections, subcontracting costs, lost revenue and vehicle write-offs'.
As the intrinsic value of a business is the sum of its future discounted cashflows, this one-off cost hasn't changed our view of the company. What would worry us is if the slow down in the resources sector savaged revenues and margins, the company had sweated its fleet over the past five years requiring a major investment in addition to the recently announced landfill remediation costs, or if the company started making rash acquisitions to boost growth because it wasn't able to reclaim lost market share at decent margins. A deep recession or a price war would also make buying at today's price a mistake, at least in the short term.
We'll explore these themes in more detail when the company announces its results in February, but we're encouraged that some overseas owners of Transpacific's local rivals are potential sellers. Transpacific may or may not be a bidder, as chief executive Bob Boucher is focused on buying landfill sites (which don't come cheap) and it would be a hard to justify buying a rival on an enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of 10 or more (the likely price one of these businesses would fetch) when your own company trades on a multiple of below six. But like the recent sale of its New Zealand waste business (see Five reasons to buy Transpacifc from 23 Jul 14 (Buy – $1.085), a transaction might be another sign that Transpacific is cheap. Transpacifc may even be a takeover target itself for a large foreign player given its low debt levels.
As we said in past reviews it might still pay to stagger your buying, and we highly recommend sticking to the recommended portfolio limit of 4%. Despite having many long-term contracts, Transpacific's higher margin work is sensitive to the economy, which could slow quite significantly as the major LNG projects are completed. Boucher's strategy (which we've discussed in past reviews) also won't show results for at least a couple of years, so the share price is likely to bounce around in the interim even if it eventually pays dividends.
The company's share price has increased 7% since The 'good growth & okay yield' mini portfolio from 13 Oct 14 (Buy – $0.845), but as it's fallen 17% since Five reasons to buy Transpacifc we're sticking with BUY.