Analyst: Henry Zhang
Ticker: OTC:LTKBF, TSX:LGT.B
All Analysis is based on shares of LGT.B and all values are given in CAD.
Logistec Corporation (Logistec) is a marine and environmental services provider based out of Montréal, Quebec. Within the firm's marine services segment, it provides cargo handling, stevedoring (loading & unloading vessels), transportation, and marine agency services. Within the environmental sector, the firm provides structural rehabilitation for underground water mains, regulated materials management, site remediation, risk assessment, and woven-house manufacturing.
Business Overview and Fundamentals
Logistec Corporation (TSE:LGT.B) primarily operates under several subsidiary companies within both the marine and environmental services industries. Below is the list of subsidiaries that Logistec has ownership in.
Logistec specializes in handling dry cargo. Typically cargo contains raw materials, dry bulk, fruit grain, and bagged cargoes. The firm operates in 44 terminals at 30 different ports. Logistec also offers container stuffing and destuffing, warehousing and distribution, ancillary trucking services, and manages coal transportation via railway.
Location of Terminals
Within the marine services segment, Logistec primarily operates under the following companies:
Logistec Stevedoring Inc.
Operates Marine Terminals within North America and provides stevedoring, truck and rail loading and warehousing services.
Nunavut Eastern Arctic Shipping
Nunavut Eastern Shipping is a subsidiary of Transport Nanuk Inc, Joint-venture with the Northwest Company. The firm provides cargo consolidation services, vessel transportation, containerization and marine transportation for Arctic communities.
Logistec Marine Agencies Inc.
The firm provides marine services which includes completing government forms, assistant crews, vessel repairs, ship spares and any other husbandry matters. The Company operates under Sorel Maritime Agencies Inc. Ramsey Greig & Co. Ltd. and Churchill Marine Agencies at various ports.
Logistec operates within the environmental services industry through Sanexen Environmental Services Inc. (Sanexen), a wholly-owned subsidiary that specializes in the consultation of contaminated site remediation and water main rehabilitation. Sanexen provides trenchless structural rehabilitation of underground water mains, regulated materials management, site remediation, risk assessment, and woven-hose manufacturing for industrial and governmental customers. Through Sanexen, the Company acquired Mistral Environnement SAS, a materials management services firm located in France, allowing Logistec to expand geographically.
Sanexen developed the Aqua-Pipe technology, which allows for the rehabilitation of drinking water supply lines by creating a new structural pipe within aging pipes that have reached the end of their useful life. Aqua-Pipe is composed of a composite material with a specific epoxy resin. The structural lining used in the Aqua-Pipe is manufactured by Nieder Inc., a fully-owned subsidiary of Sanexen.
Common Shares (Class A and Class B)
Logistec has its stock listed on the Toronto Stock Exchange as LGT.A and LGT.B. Class A Common Shareholders are entitled to 30 votes per share. Class B Subordinate Voting Shares receive only one vote per share, but holders are entitled to receive a dividend equal to 110% of any dividend declared on each Class A Common Shares. On May 7 th 2014, Logistec approved a two-for-one stock split of both Class A and Class B Shares.
Within the firm's marine services segment, part of the growth strategy includes strengthening the existing network. The company wants to focus on maximizing cargo utilizing existing networks, diversifying cargo base, and maximize efficiencies through modern processes. Additionally, Logistec is looking to diversify and grow their existing network by accessing new ports within North America, creating value-added solutions, outsource and provide turnkey solutions, and to focus on mining, biomass and port logistics. Within port logistics, the firm expanded into transloading services within Montréal, Québéc in 2015 and expects continued growth in 2016.
The focus on environmental services segment growth is primarily based on geographic expansion. For the Aqua-Pipe, Logistec is looking to expand primarily within the United States and for other environmental services, the firm wants to focus on expansion within Ontario, the Arctic and France.
The firm is looking to grow through acquisitions in order to expand the firm's port network and to take advantage of the difficult economic environment. In 2015 and 2014, the portion of capital expenditure being invested into new projects were 63.4% and 52.0% respectively.
Normal Course Issuer Bid (NCIB)
Since 2005, Logistec has repurchased shares for cancellation purposes. Each NCIB starts on the October 24 th and ends on October 23 rd the following year. Under the 2015 NCIB, the Company is intending to repurchase up to 5% of issued and outstanding shares (approximately 249,460 Class B shares). However, historically, the average number of shares actually repurchased was equivalent to approximately 3%.
*2013 was adjusted for stock split
Revenue Growth and Segmented Geographic Revenue Breakdown
Logistec has seen excellent growth in the last 5 years with a compounded annual growth rate of 12.0%, driven by growth within the environmental services segment. Geographically, Logistec's revenue streams are located entirely within Canada and the United States, making up 69.6% and 30.4% of revenue respectively. The firm's top line is broken down into their marine services and environmental services. Although Logistec's revenue is primarily composed of marine services, the environmental services segment has been growing at a higher rate.
Low Dividend Yield and Consistent Dividend Growth
Logistec has either maintained or increase dividends annually in the past 10 years. Although they have increased dividends, the most recent dividend yield was only 0.85%. Additionally, the firm's payout ratio has not grown in line with annual dividend distributed. Therefore, it should be noted that although there has been consistent annual dividend growth, Logistec is not a dividend stock.
Purchase of Remaining Shares of Sanexen
On March 24 th 2016, Logistec entered an agreement to acquire the remaining 29.8% equity interest in Sanexen for $43.8 million, giving Logistec 100% equity interest in the subsidiary. The acquisition of the remaining shares of Sanexen is important for the future of Logistec. It allows Logistec to fully enter the environmental services industry, which is where we believe majority of the growth for the firm will occur.
Brunswick Warehouse Fire and Virginia Flood
In 2015, a fire in Brunswick, Georgia destroyed two warehouses and caused significant damage at the Company's bulk facility. Insurance will be sufficient to cover the cost associated with the fire. This resulted in higher handling costs, storage constraints and productivity issues. Reconstruction of the warehouse has started, but operations will be impaired until it is fully completed. Although the damages from the fire will cause short term difficulties and higher costs, the new warehouse will be larger and more efficient. Also in 2015, Logistec's paper warehouse in Virginia suffered major cargo damage due to a flood which caused similar efficiency issues.
New Terminal in Montréal, Québec
Logistec is in the process of completing a new terminal located in Montréal, Québec. The terminal is in operation, but will be finished by the end of 2016. Early operations led to higher temporary costs. The development of the new terminal allows the firm to maximize efficiency at the location upon completion.
Macro Environment and Industry Overview
Stevedoring and Marine Cargo Handling
The Stevedoring and Marine Cargo Handling industry is expected to grow on average by 3.4% annually over next 5 years. The growth is primarily fueled by expected increase in oil prices starting in 2017 and expected higher demand for ocean transportation. Because water transportation has a low per-unit shipping cost, increase in oil prices are correlated with increase in demand for water transportation. The industry has limited growth potential since geographically, it is limited to only existing ports of call and building new ports often require a large amount of capital and time to complete. However, this also acts as a barrier to entry for potential competitors who are trying to enter an industry or expand into new ports. The historical 10 year average annual revenue growth is 4.1%.
Ocean and Coastal Transportation
In recent history, the industry has suffered from lackluster demand due to poor domestic economic conditions and stagnant per capita disposable income growth. This led to slower retail and manufacturing activity and a decline in transportation needs. Although the annual revenue growth for the industry within Canada and the United States is expected to grow by 1.7% and 2.4% respectively, headwinds attributed to lackluster demand for commodities and lower dry-bulk rates remain, which will affect the industry's revenue. Barriers to entry within the industry are high due to high regulation, strict policy requirements and high capital intensity. Additionally, large and established firms are more likely to obtain large, long-term contracts.
Over the last five years, the industry experienced mixed results with only an annualized growth of 0.5% which came from an increased emphasis on environmental sustainability, but was offset by a decrease in government funding. In the next five years, the industry is expected to grow on average by 4.9% annually, which is primarily driven by an expected increase in environmental protection legislation and regulation. Government expenditure and investment, another key driver for the industry, is expected to grow at a slow, yet steady pace.
Water and Sewer Line Construction
The demand for the water and sewer line construction declined in the last few years due to residential construction collapse and budget deficits faced by the governments. The 2009 American Recovery and Reinvestment Act propelled some growth within the industry since a large amount was allocated to the Environment Protection Agency's (EPA) Clean Water State Revolving Fund and Drinking Water State Revolving Fund, but the government budget sequestration in 2013 hindered further industry growth. Because of the lack in funding, the industry's average annual revenue growth declined by 1.7% annually over the last 10 years. The industry has since seen some recovery with an annual growth of 2.2% in the last 5 years.
Over the next 5 years, the industry is expected to grow annually by an average of 2.1%, which is led by an expected increase in local and state government investment in infrastructure as mandated by the EPA. Within the United States, much of the water and wastewater infrastructure is outdated and will need to be replaced in the near future in order to ensure safe water streams.
Remediation and Environmental Clean Up Services
Over the next 5 years (2017 - 2021), the industry within North America is forecasted to grow by approximately 2.2% annually. The United States saw zero growth over the last five years due to government budget constraints, while Canada had very minimal growth. The forecasted growth is primarily fueled by expected increase in government spending on both sides of the border since the industry relies heavily on public-sector funding for remediation projects.
Barriers to Entry - Marine Services
1. Capital Intensity
High costs comes from the purchase of cranes, vessels, vehicles and other specialized equipment and the large land expenses associated with the industry.
2. Previously Established Relationships and Contracts
New entrants are at a disadvantage since many firms have long established relationships with current industry customers. Many of these contracts are secured for years with well-established companies and therefore, the number of opportunities are limited unless the entering firm is looking to acquire an established competitor.
3. Limited Land
Waterfront land that is capable for a cargo-handling terminal is very limited. Most established ports are government owned and requires permits and government approval before the firm could begin operations at the location.
4. Strict Regulation
New entrants must satisfy strict safety, environmental, labour and licensing requirements in order to operate.
Barriers to Entry - Environmental Services
1. Need for Highly Skilled Workers
Within the environmental consulting industry, companies are highly reliant on skilled workers to provide the solutions. These workers require advanced backgrounds and experience.
2. Government Regulation
Operators are subject to extensive clean up regulation at all levels of government. Failure to meet regulations will result in fines towards the company. Often, permits are required to operate, which are difficult to obtain and may be costly.
3. Fixed Price Contracts
Since contracts have a fixed price, companies must be able to properly assess a project's cost in order to make a profit. Established firms already know the cost and therefore, smaller and less experienced firms have a larger risk of miscalculation and making it more difficult to enter the industry.
Drinking Water Infrastructure Replacement Demand in the United States
Within the United States, much of the drinking water infrastructure is nearing the end of its useful life and will need to be replaced. Between 2011 and 2035, an estimated cost of $536 billion will need to be spent on replacing the aging water mains within the United States. By 2040, national-level investment is expected to grow from $13 billion a year to $30 billion annually, which will be used to cover majority of the costs associated with replacing the water pipes. Although investments into new water infrastructure will increase to accommodate some of the demand, most municipalities will still be restricted by budget constraints. If Sanexen is able to position itself as a lower cost, less disruptive and more efficient alternative to digging, removing and replacing existing pipeline, the Company should see an increase in demand for the Aqua-Pipe Technology.
Merger and Acquisition Activity for the Transportation and Logistic Industry
One of Logistec's growth strategies is to expand through the acquisition of other firms within the industry. Since there are a limited number of ports within North America, expanding inorganically is a viable option. In the first quarter of 2016, there was a decline in deal activity, however, there was strong megadeal activity with over 71% of total deal value in the quarter coming from five deals. Due to the lower crude oil prices, firms incur lower costs and now have funds to be used for capital spending, which includes acquisitions. There is an increase in number of Transportation and Logistic companies that continue to drive growth through inorganic means. Within the near future, the growth of mergers and acquisitions within the Transportation and Logistics industry is expected.
Ms. Madeleine Paquin, President, CEO, Director
Ms. Paquin has been the President and CEO of Logistec Corporation since 1996 and a director of the Company since 1987. She is currently a director for several marine commerce related organizations and therefore is well connected within the industry. Ms. Paquin does not own any Class B stock. Because of her long tenure with Logistec and her connections within the marine commerce industry, she will be vital for the growth of the firm going forward. Her compensation in 2014 included a salary of $468,269 and bonus of $469,976.
Mr. George R. Jones, Chairman of the Board
Mr. Jones formally served as one of the directors for Logistec and is currently a director for MagMinterals Potash Corporation. His previous experience within the natural resources industry will prove to be critical for the firm's success in both the environmental services and marine services segment. It should be noted that Mr. Jones is currently 70 years old and should be expected to retire in the near future.
Shareholder Base, Liquidity, Capital Structure
Logistec has 4,764,200 shares outstanding. Majority of the shares outstanding are held by institutions with the rest being held by mutual funds. The top five shareholders are Sumanic Investment Inc. (45.79%), Caisse de Dépôt et Placement du Québec (8.20%), Walter Financial Inc. (8.18%), QV Investors Inc. (7.76%) and Mawer Investment Management Ltd. (1.89%).
Low Trading Volume and Illiquidity
Logistec's stock experiences very little to no trading volumes on most days. The 12 month average daily volume is about 2,450 shares, which is very low, especially considering the market capitalization of the stock.
Currency Fluctuation Risks
The firm currently operates primarily in the United States and Canada, which means the Company is subject to fluctuations between the CAD and the USD. The risk is greater for Logistec since they do not currently hedge against either currency. Although it may not affect Logistec directly since each segment of the business is financially self-sustaining, including the firm's U.S. subsidiaries, it may affect the demand from consumers. Canadian firms that operate within the United States may incur higher costs due to the exchange rate and therefore may cause demand fluctuations for Logistec's services within the United States. Over the last two years, the USD/CAD exchange rate has seen significant fluctuations.
Source: Yahoo Finance
Logistec's stock does not have a high daily trading volume and therefore, shareholders may have troubles trying to exit their position. Due to Logistec's illiquidity and its small market capitalization, the firm's stock is exposed to potential price manipulations and other illiquidity risks that could come from a small number of large trades.
Because of the experience that Logistec's management team has within the marine services and environmental industry, they play a crucial part in the success of the firm. The loss of any member, especially Ms. Paquin, can have severe negative results for the firm.
Labour Related Risk
The marine services segment of Logistec is strongly unionized. Due to the nature of unions, risk arises from the possibility of strikes and work stoppages when the two sides are negotiating collective agreements. Additionally, certain facilities are located near areas where it can be difficult to find qualified labour.
Discounted Cash Flow Analysis Assumptions
Weighted Average Cost of Capital Calculation
The weighted average cost of capital (WACC) was calculated to be 7.36%. This took into consideration the risk free rate, equity beta, expected market return, tax rate and financing methods. In order to consider changes in Logistec's WACC, we have included a sensitivity analysis in the appendix.
In general, we believed that the firm would operate at historical values or grow in line with net income since there were no indications that would lead us to believe otherwise. Other assumptions are listed below.
Logistec has a generated an average five-year annual growth rate of 12.4%. However, we do not believe a 12.4% growth rate is sustainable because of the mature industry that the Company operates in. Therefore, we implemented a conservative growth rate of 6% for the next five years (2017 - 2021) based on the following factors:
1. For Logistec's marine transportation segment, we believe that the firm will grow in line with the growth of the United States trade volume at 4.6%
2. Although the forecasted growth for the environmental consulting industry is 4.9%, we believe Logistec will be able to grow at a higher rate due to the expected demand from the need to replace water pipes
3. Large increase in demand for water pipe replacement within the United States in the near future after lackluster historical growth from the past 5 years
4. Forecasted 3.5% revenue growth for the stevedoring and marine cargo industry and historical five-year revenue growth (2011 - 2016) of 4.1%
5. Reconstruction of the warehouse in Georgia and Virginia combined with the completing of the Montreal warehouse will allow the Company to maximize efficiency, while reducing costs
Following the 5 years, we expect the firm to gradually decline in growth as it approaches the forecasted long-term perpetuity rate of 2.0%, which represents the estimated GDP growth within North America. Since there can be changes to the GDP growth rate in the future, we have included a sensitivity analysis in the appendix.
We projected equity repurchases to equate to approximately $3.1 million of shares outstanding per fiscal year. This represents an approximate repurchase of 3.01% shares outstanding at $40.00 per share. We projected the repurchase to occur for at least 10 years since the NCIB has been utilized since 2005 and the management team has given no indications that they have considered canceling the program.
Historically, capital expenditures have been represented as approximately 7% of sales. However, since one of Logistec's growth strategies is to expand their network of ports through acquisitions, we believed that capital expenditures must grow at a faster rate. Therefore, we projected capital expenditures to be approximately 8% of sales.
The statutory income tax rate for Logistec is 27.9% as stated in the 2015 annual report. However, we noticed that in recent history, the effective tax rate has fluctuated from the statutory tax rate. Therefore, we used a tax rate of 22.38%, which represents the average effective tax rate over the past five years.
Class A and Class B Shares
Logistec offers both class A and B shares. For the purposes of our discounted cash flow analysis, we determined the proportion of net income that is attributed to each class utilizing the earnings per share and the number of shares outstanding, as stated in the most recent annual report.
Comparable Company Analysis
Because Logistec operated in two different industries, there were no true comparable companies for the firm. However, there were several publicaly traded firms that operated solely within the marine transportation industry or the environmental consulting industry. Therefore, we decided to have two comparable company analyses (CCA) in our valuation. The target share price was weighted based on the most recent revenue segment breakdown being 57.7% and 42.3% for the marine services and the environmental services segment respectively. Based on the industry, we will be valuing the company based on the EV/EBITDA multiple.
We used the following companies for our analysis on the marine services segment.
1. Algoma Central Corporation
Algoma is a Canadian based marine transportation firm that operates in three segments: Domestic Dry-Bulk, Product Tankers and Ocean Shipping.
2. Nordic American Tankers Limited
Nordic American Tankers Limited is an international tanker company. The firm includes two main subsidiaries: Scandic American Shipping Limited and Orion Tankers Limited.
3. Wisdom Marine Lines Co.
Wisdom Marine Lines engages ship leasing and marine transportation. The firm primarily focuses on bulk cargo and general cargo, which includes raw materials.
4. PBF Logistics LP
PBF Logistics LP is engaged in the receiving, handing and transferring of crude oil. The Company operates in the transportation, terminaling and storage industries.
5. XPO Logistics, Inc.
XPO Logistics, Inc. provides transportation and logistics services and supply chain solutions.
6. U-Ming Marine Transport Corporation
U-Ming Marine Transport Corp. is a Taiwan-based company that focuses on the transportation of bulk cargo. The Company is also involved in shipping agent services and vessel trading businesses.
We used the following companies for our analysis on the environmental services segment.
1. Tetra Tech, Inc.
Tetra Tech, Inc. provides consulting, engineering, program management and technical services that focus on natural resource management.
2. Tutor Perini Corporation
Tutor Perini Corporation is a construction company that offers general contracting, construction management and design-build services. Within the Civil segment, the Company focuses on the construction and the repair of infrastructure.
3. TRC Companies, Inc.
TRC Companies, Inc. provides engineering, consulting and construction management services to the environmental, energy and infrastructure markets. They are primarily based on the United States.
4. Ecology and Environment, Inc.
Ecology and Environment, Inc is an environmental consulting firm that provides environmental solutions to private and various levels of government.
5. Fluor Corporation
Fluor Corporation is a holding company that provides professional services that operates in five different segments, which includes Industrial & Infrastructure and Government.
6. Mastec, Inc.
Mastec, Inc. is an American based company that is involved in a range of industries. Its primary activities include engineering, building, installation, maintenance and upgrades of communications, energy and utility infrastructure.
Using our DCF assumptions, we determined a target share price of $48.07. With the comparable company analysis, we determined a target share price for the marine services segment to be $38.59, while the environmental services segment produced a target share price of $54.96. Therefore, the weighted target share price for the comparable company analysis was determined to be $45.92. Because Logistec operates in two completely separate business segments, there is no true comparable to the firm and therefore, we decided weight the DCF and CCA at 75% and 25% respectively. Using a weighted DCF and CCA, our 12 month target share price for Logistec is $47.43
Although Logistec is operating in two mature industries and their historic growth rate of approximately 12% is seemingly impossible to maintain, there is still value in the firm, especially considering the expected macroeconomic headwinds in the near future. Based on their strong management team, expected increase in demand for the Aqua-Pipe technology and Normal Course Issuer Bid in place to create shareholder value, we believe that Logistec is currently undervalued in the market.
Therefore, based on our analysis, we determined a weighted target share price of $47.43 on a 12 month time horizon and a buy rating. If Logistec is able to secure contracts to fully take advantage of the demand for water infrastructure replacement and extend the growth of the marine services segment through acquisition and organic growth, the Company should expect to see an increase in their value in the near future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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