The fun part of capital market investment is that – Good leads will always lead to more good ideas.

Following my previous Nylex post (up by a humble ~10%), I’ll reveal another idea related to Nylex and aligns to my obscure series of ideas.   

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Summary

Ancom Logistics is about to experience a significant change of fortune.

Ancom, Ancom Logistics and Nylex are associated companies. As my previous post - Ethanol theme on an obscure small-cap industry leader – indicates, Nylex will experience a surge in its ethanol (key ingredient for manufacturing sanitizer) product demand.

• Ancom Logistics is in the right position to reap the benefit. Nylex has been contributing ~20% of Ancom Logistics revenue. It will be more going forward.

• Ancom Logistics will also benefit from the lower fuel price environment. Fuel cost is a major cost component. Lower fuel price will materially broaden its margin.

• Also, because of fixed cost nature of the business, any small amount of revenue improvement could lead to significant jump in earnings. Ancom Logistics having not being able to attain its full potential over the years, will soon experience significant change of fortune as Nylex’s sales kicks in.

• Market fails to acknowledge the change of fortune while valuation remains exceedingly cheap

• All in all, one should expect a many fold jump of earnings in Ancom Logistics.

Description

Nylex ethanol/sanitizer will experience a sudden spike of demand, and this is a fact.

Nylex, on top of having most of its resources allocated into its manufacturing arm, it maintains a small fleet of distribution team itself – the logistic division. Given the condition that demand will spike, that small distribution team won’t cope.

So, what is the likely next course of action from the management? Ancom Logistics.

Ancom owns Ancom Logistics and Nylex. And there has been a fair amount of RRPT over the years amongst the companies to attain certain synergies. Completely understandable.

However, despite the support from Ancom and Nylex, Ancom Logistics performance has not been sterling to say the least – Revenue of ~RM30 mn and Pretax profit of ~RM2 mn for the past few years.

Logistics is broadly a fixed cost business namely infrastructure has to be in place before the securing of businesses. i.e. one has to build a warehouse or buy a truck before earning thin margins from orders – that is if there’s any. The reason for Ancom Logistics’ miserable performance is because it fails to attain the economies of scale to attain its optimum output.

All is about to change. Ancom Logistics will experience a sudden spike in its revenue as the ferocious demand for Nylex ethanol/sanitizer kicks in – that is including the newly installed capacity which is commissioned in recent months.

Fact is, Nylex has already been contributing ~20% of Ancom Logistics sales before the sanitizer demand hits. (Ref: AR2019)

The beauty of a fixed cost business model is the operating leverage, namely, in laymen, any increase in sales will almost flow straight down to the bottom line. So any decent increase in revenue will lead to exponential growth in earnings.

My estimate is that a +10% change in revenue could lead to +32% change in PBT. So a reasonable +30% increase in revenue translates to >+100% improvement in PBT. This is excluding the potential fuel cost savings mention below.  

Oil price tanked is a mega boon to logistics companies. If NTPM – a tissue paper manufacturer can save RM30k/month or RM360k pa. (ref: RHB on NTPM), the impact of the savings could only be better for a pure breed logistic company like Ancom Logistics.    

Has all the above catalyst reflected on price? No. Share price has merely recovered to the pre-coronavirus sell down level. The positive change of prospect is definitely not reflected on price yet.

In terms of valuation, Ancom Logistics trades at ~13x PBT. Balance sheet looks typical logistics like, nothing interesting neither threatening. Real estates are pretty dated and worth a lot more than accounting value – but that is immaterial.

Cash flow is self-sustainable. Dividends are lumpy but that is because of lousy performance in the past. There is reasonable chance it will increase as the change of fortune occurs. A significant change of fortune it is!

Catalyst

1. Material revenue improvement spillover from Nylex’s ethanol/sanitizer related products’ ferocious market demand
2. Oil price tanked a huge boon for logistic business/companies
3. Earnings profile to improve significantly driven by operating leverage and fuel cost savings
4. Market fails to acknowledge the change of fortune
5. Valuation is exceedingly cheap on the potential