The management of Allcargo Global Logistics is planning to go ahead with a demerger of its Global LCL business. In addition the company has alsoannounceda share buyback prior to the demerger. Both theannouncementssound bullish from short to medium term perspective and may lead to a lot of value unlocking for the shareholders.
There are two things here. First, it is not a classic long term buy and hold stock. Here we are looking at a special situation unfolding. The company is demerging its global LCL (less than container load business) which is doingreasonablywell. Further, on a consolidated basis the EPS works out to be aprox Rs 17 per share(the reported EPS of Rs 21 is for 15 months ending mar 12 as the company has changed its reporting period form dec to mar). The balance sheet is reletively clean. Even on these accounts the stock price isn’t expensive. Plus the last 5 year CAGR of 20% for sales and profits. Looks like a nice package for a nice gain.
The business models of SCI and allcargo arecompletelydifferent. Allcargo is asset light where as SCI is asset heavy( Refer their balance sheets and corporate websites). Profitability of the two companies are also contrasting as allcargo has donereasonablywell in FY 12.
Moreover the management is also planning to raise funds post the demerger for the demerged entity via public offering. This will surely lead to a lot of value unlocking for the global LCL business of the company.
This stock has recently fallen down to what i consider as very reasonable valuations. I cant see any other reason for the fall except from the general malaise in the infra sector. I do think that investors are wrongly clubbing the company with other companies in the infra space in general. I have done some research on the company and think it has a solid business model. Basically they have three divisions with good synergies (hate that word, i sound like a consultant):
MTO - which is a steady cash flow generator and should continue to be so. Doesnt require too much capital.
CFS - Again good margins and cash flows.
P&E - Now this is the problem area. This business is quite simple, they buy construction equipment such as cranes and rent it out. The company has spend close to 600 cr in capex on this segment in the last 2 years. Currently this is going through a downturn because of the slowdown in construction, realty etc.
The company does not have too much debt and will easily survive the downturn. Not only it has good cash generating businesses but also reasonable debt. But currently it is going down with the rest of the industry. It will recover quite fast once economy starts recovering (unlike many infra companies with ridiculous debt equity ratios of 4-5), only question is where will the bottom be.
I’m trying to catch the bottom, but even the current valuations look good.
called’em up today.summary of whatever i remember.accuracy not vouched for nor guaranteed
Demerger is firmly in the not-happening zone ,ostensibly in the name of shareholder value considering that the NVOCC division is unlikely to get anywhere near a fair value(somehow in most of the other spinoffs i ve investigated market sentiment has never been a factor of consideration)
Being reliant on sentiments governing global trade and investment in all it’s segments.allcargo fully expects a couple of ‘irritating’ quarters ahead.
it has scaled back capex and hiring plans
volumes have contracted.
p&e will probably be the last division to make it into black apparently
p.s. fully appreciate the candid and fair disclosure of the c.s.The presence of Ruane does much to bolster confidence.Should be investigated at the very least as a mean reversion play