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.
The shipping industry going through one of its worst cyclical down turn phases.SCI is now at 59 rs.Wont this n continued downturn in commodities adversely impact these logistic companies?
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.
A comparison with Gateway - current capacity and expansion in different businesses
CFS Cap
Expan
ICD Cap
Expan
Rail
Expan
Cold Stor
Expan
MTO
Gateway
500000
108000
350000
233500
88500
33000
46000
NA
Allcargo
441000
0
88000
NA
NA
NA
NA
216000
Allcargo operates in MTO, CFS and P&E business,
Gateway operates in CFS, Cold Storage and Railway Logistics
CFS
business can be high moat business as once most lucrative ports and locations
are takenup the company will have good moat when economy grows and capacities
fillup
Allcargo
has 81% of revenue from MTO operation
which has low OPM of 5.6%. It is difficult to ascertain the potential of this
business.
CFS
is the high margin business in which Gateway has higher capacity and better
margins. Gateway has more number of CFSs lowering risk.
CFS
business of Allcargo has declined by 27% in Q-3 comapred to decline of 2% by
Gateway.
P&E
business of Allcargo has made losses this quarter largely due to provisioning
for bad debts. The com is confident of recovering the amount.
P&E
business of Allcargo had a 20% OPM earlier, which has declined to 10% this
year due to provisioning. Pickup in this business will augur well for the
com.
The
cold stroage business of Gateway seem to have technological moat due to tieup
with the Japanese major. Mitubishi and Nicherei have invested in this
business.
Gateway
has only 51% stake in the high growth cold storage business. The OPM for this
business is 23%. The business grew by 93% this year
More
raise of haulage charges might lead to lower realisations in the the rail
business for Gateway.
Gateway
management has more detailed investor concalls and information in the
reports. The management seem to be pro-investors with high divident payouts.
Overall
Gateway seem to be better placed to tap the Indian logistics story operating
through integrated CFS-ICD-Rail model with Cold storage holding high
potential
The
operating margins and lesser decline in business even during difficult times
shows they have more stable business.
The
higher dividend yield at 4.5% offer decent margin of safety.
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