Some Logistic Companies

“Investing is ultimately a function of two things- A good story and a judgement call that the story is not in the price.”

Logistics is a crucial facilitator of Malaysia’s trade and economic growth. It plays a crucial role in enabling the smooth, safe and cost efficient movement of goods and resources.  

Malaysia’s growing trade volumes and strong economic performance has seen freight volumes growing and demand for logistics services increasing by about 5% in 2013. As long as the nation’s economy remains robust and its trade volumes grow, its logistics sector can look forward to a bright future.

Let us have a look at three major logistic companies listed in Bursa and see how they have been performing in the past few years. These companies are Freight Management Berhad, Tasco Berhad and Century Logistic Berhad.

Freight Management Holdings Bhd is engaged in the freight and forwarding industry. It operates in two services: logistics and marine. The logistics has five segments, which is involved provision of integrated freight and logistics services, such as sea freight, air freight, rail freight, warehouse and distribution, haulage and other freight services, which are operated by companies in Malaysia, Australia, Indonesia, Thailand and Vietnam. Marine's segment is engaged as charterers and operators of barges and tugboats, which is operated by companies in Singapore.

Tasco Berhad offers logistics solutions covering air, sea and land transportation. It has categorized its services into international logistics solutions and domestic logistics solutions. International logistics solutions provide air freight services, sea freight services and buyer consolidation services. Domestic logistics solutions provides custom clearance, haulage transportation, warehousing services and warehouse implant services, through forwarding division; car carrier and pre-delivery inspection, through auto logistics division, and domestic trucking and cross border trucking, through trucking division.

Century Logistics Holdings Berhad operates in two divisions: total logistics services and procurement logistics services. In oil and gas logistics, the Company provides floating storage and transhipment services for international oil trading companies. It also provides procurement logistics services to electrical and electronics customers. The Company is involved in the supply chain management and ship husbandry for fuel oil traders, including the services for floating storage units (FSU) within the port limits of PTP and Pasir Gudang in Johor. In addition, it offers a range of procurement and assembly services for various electrical and electronic products.

Past and present growth

As shown in Figure 1 below, both Freight and Century enjoyed double digit compounded annual growth rate (CAGR) in revenue in the last five years with Freight the highest at 15% a year and Century 11%. Tasco’s growth is not bad too at 7%. However, last year Tasco recorded a remarkable growth of 26% to RM560m due to the improvement of almost all its local and international divisions, compared to 11% of Freight to RM365m and the flattish growth of Century at RM256m. Thanks to the tie-up of Tasco with its Japanese partner which provided it with many Japanese customers. Its latest first quarter 2015 results ended 31/3/2015 shows its revenue increased by 30% to RM135m and net profit almost double to RM10m.

Earnings wise, Century has the most remarkable CAGR of 40% for the last 5 years, followed by 20% and 14% respectively for Freight and Tasco respectively as shown in the figure above. Last year, although revenue is flattish, Century achieved an earnings growth of 40% to a net profit of 21.6m, while Freight’s net profit improved by 11% to RM24.8m, and Tasco just 5% to RM30.5m.

It appears that Century has the most impressive growth for the past 5 years. But which company is the most efficiently run company?

Profitability and operation efficiencies

In terms of net profit margin (NPM), Century excels with the highest of  8.4%, followed by Freight (6.4%) and Tasco the lowest at 5.4%.

However, Freight, with the most asset-light outfit, has the highest in the return of equity (ROE) and return on invested capital (ROIC) of 16.4% and 15.2% respectively due to its high assets turnover and financial leverage, way above its cost of capital shown in Figure 2 below. In this case, Freight has cleverly utilize other people money to earn good return for its shareholders.

Tasco follows closely with respectable ROE and ROIC at 11% and 13% respectively. These are still above the costs of its capitals which is good. However return on capitals for Century is marginally acceptable at 8.5% and 11.7% respectively. Tasco has the highest free cash flow (FCF) at RM16.8m while Century’s FCF is negative due to its high capital expenses last year.

Freight appears to be the most efficient company among the three with the highest return on capitals, followed by Tasco and Century. They are all considered as good companies with Freight the best. However, the best company may not be the best investment depending on the price.

Some Simple Valuations

The closing prices on 12^th August 2014 are used for the computations. I am indeed surprised that Century is given the highest valuations earnings wise with PE ratio of 13.1 and price-to-sales of 1.2 as Freight is way more efficient than it. This could be the recent run up of its share price due to the corporate exercise proposal of bonus issues and share split. PE ratio for Tasco is the lowest at 10.3 and hence the cheapest in price. Freight deserves the highest price-to-book at 1.9 as it is an asset light company.

However, these companies have different capital structures. Both Freight and Century have total debts about 0.3 times their equities whereas Tasco has the lowest at 0.1 time only. Their cash levels are also different. Hence a better measurement for valuation maybe by using enterprise values.

In term of enterprise value, Century is again surprisingly accorded the highest valuation with enterprise value 11.1 times Ebit. Tasco’s enterprise value is substantially lower at just 5.3 times its ebit. This translate to a high earnings yield of 18.7%. Tasco’s price-to-CFFO is also substantially lower than Freight.

Hence overall, Tasco is the cheapest among the three logistic companies from the above evaluation, not forgetting that Freight and Century still have outstanding warrants which will increase their valuations further.

Conclusion

Out of the three logistic companies on comparison here, Freight appears to be the best run company with its asset-light outfit and the highest return on capitals. However, Tasco appears to be the best value for money. It is trading at a relatively low PE ratio and enterprise value in relation to its ebit. Moreover, Tasco’s near term future appears to be bright with a sharp growth for its first quarter 2015 results just announced with revenue and net profit increased tremendously at 30% and 90% respectively. This has not been taken into consideration in this evaluation.

I have added Tasco as a stock in my portfolio.

K C Chong (11^th August 2014)

Appendix

Table 1: Comparisons of some logistic companies