18-Dec-2020: Ord Minnett Research: Lindsay Australia Limited: Rail strategy can change the journey
Analysts: Ian Munro, Senior Research Analyst, (03) 9608 4127, imunro@ords.com.au + Joshua Goodwill, Research Associate, (03) 9608 4121, jGoodwill@ords.com.au
- Last Price: A$0.32
- Target Price: A$0.40
- Recommendation: Buy
- Risk: Higher
- Sector: Trucking [Transport & Logistics]
- ASX Code: LAU
- 52 Week Range ($): 0.30 - 0.37
- Market Cap ($m): 95.8
- Shares Outstanding (m): 299.5
- Av Daily Turnover ($m): 0.0
- 3 Month Total Return (%): -5.9
- 12 Month Total Return (%): -7.2
- Benchmark 12 Month Return (%): -1.3
- NTA FY21E (¢ per share): 30.3
- Net Debt FY21E ($m): 100.8
We initiate coverage on Lindsay Australia with a BUY rating and $0.40 price target. The company’s investment in a wider geographical footprint into high growth horticulture regions is starting to yield returns, with company guidance pointing to high single digit EBITDA growth for 1H21e. Most importantly, the commitment to more than double the rail transport business to 450 units by June 2022 can help grow new business and provide material uplift to free cash flow and returns on capital during FY22e and FY23e. Evidence that the rail investment can materially improve return metrics is the major catalyst to close the P/E ratio discount versus peers.
A key logistics and rural partner to the horticulture sector
- Lindsay Australia is an integrated provider of logistics services and rural goods to the horticulture, co-operative and corporate market across Australia. The company specialises in time and temperature sensitive freight, mostly fresh fruit and vegetable produce for the domestic and export/import markets. Lindsay operates in all major Australian States and has diversified geographically into emerging horticultural regions.
1Q21 AGM update provides an upbeat outlook
- FY20 AGM guidance reported +8% underlying EBITDA growth during 1QFY21. This rate of growth is expected to be maintained into 2QFY21, supported by the benefits of FY20 investment into the new logistics hub in Sydney and Perth and continued ramp up in operations in Northern QLD. Performance of the rural business also reads positively, with recent expansion into regions that hold synergies with the transport segment yielding well and trading conditions and pricing across the horticultural segment positive. Commercial/passenger plane capacity is likely to improve during 2021, alleviating some pressure on the import/export operation. Overall, we forecast underlying EBITDA growth of 9% and underlying NPAT growth of 6% and free cash flow of $10m in FY21e.
Rail program ramping up
- Management has issued guidance of a more than doubling of rail container units to 450 by 30 June 2022. Growth in the rail franchise is cash flow and margin accretive to the group. We forecast rail to reach ~20% of group revenue and ~30% of group EBITDA in FY23e.
Investment thesis
- We are attracted to the market position of Lindsay Australia, as the largest stand-alone brand in the refrigerated produce market, and the consistency of revenue generation. Competitive advantage is found in the synergies and customer value-add leveraged through the combined transport and rural store network. Refrigerated transport holds high barriers to entry and although returns on capital are low in Australia, by global standards, the acceleration of rail services is proving to be a major positive catalyst for returns. The company is targeting a more than doubling of rail containers to 450 by 30 June 2022, which we expect to increase the share of group EBITDA generated by rail services to ~30% in FY23e.
- Lindsay Australia executed a major geographical expansion program between FY15-FY20, impacting free cash flow performance. New facilities in Northern QLD, Perth, Adelaide and Sydney have completed the national circuit and substantially diversified the customer base. Capitalising on this wider footprint remains a critical ingredient to unlocking value within the company and rerating the P/E ratio closer to peers.
Overview
- Lindsay Australia is an integrated logistics and rural supply company servicing customers in the horticultural and food processing sectors. Lindsay operates across Australia via 19 logistics terminals, 18 rural stores and an import/export hub located within the Brisbane produce markets. ~85% of transport loads carry time sensitive food related products, mostly fruit and vegetables for 3,000+ horticultural customers across Australia. Lindsay Rural also services the group's grower base, supplying farming equipment, fertiliser, nutrients, and packaging materials to an estimated 1,500 rural customers.
- Headquartered in Brisbane, the company is the second largest refrigerated transport and storage company in Australia and the no. 1 market share holder in the QLD market. Forecast FY21e net tangible assets amount to $0.30 per share. The company employs over 1,400 staff and is a founder led company, with the Lindsay family holding an estimated ~13% of issued shares.
- Operating assets include over 600 prime movers and trailers and over 200 refrigerated rail containers. Customer segments include agents, wholesalers, grocery chains, corporate and family owned farming groups. Transport revenue is a function of the number of pallets transported, distance, and storage and handling required.
- Rural revenues are mostly the sale of physical inventory for use as a horticultural input and agronomy services. Lindsay Fresh is the most recently formed segment, offering transport and handling services involved in the air and sea freight of imported and exported horticultural products.
Investment drivers
- Ramp up of the rail offering supports market share growth
- Lindsay’s growing refrigerated rail strategy is accretive to group cash flow and margins: The company has ramped up a long-haul rail transport strategy since FY18 and we see continued growth. To date, ~200 customised refrigerated rail containers have been purchased and deployed into active customer contracts.
- Rail routes currently serviced include Melbourne to Perth, Sydney to Perth, Perth to Brisbane (via Adelaide), Brisbane to Melbourne, Cairns/Innisfail to Brisbane, Brisbane to Sydney: These corridors cover the major corporate markets and catchment zones for horticultural production across QLD, WA and SA. We see continued modal shift from road to rail in the horticultural segment. Lindsay’s biggest lanes on rail are Melbourne-Perth-Melbourne and SydneyPerth-Sydney.
- Industry analysis suggests that rail services are applicable for less time sensitive freight including unripened bananas, mangoes and other fruit, vegetable varieties. The advantage of rail is in the reliability of service, improved safety outcomes with less human input, fuel efficiency relative to road transport and economies of scale shared across users.
- We understand that Lindsay Transport can offer a more competitive pricing structure on rail, relative to road transport, which we see as supportive for market share growth with existing and new customers.
- Rail is accretive to earnings margins and free cash flow
- Rail carries a lower overall variable cost structure for Lindsay transport for line haul routes: We estimate average EBITDA margins of ~16% on rail contracts, versus ~12% on road-based transport. Key rail supplier Pacific National has invested significantly in fleet size and service frequencies. The associated customer aggregation model allows Lindsay to enjoy economies of scale and partly benefit from rising utilisation within the Pacific National network.
- Rail also carries fixed cost relief for Lindsay: We estimate that each incremental rail container purchased and utilised, is equivalent to removing 0.65 truck/trailer combinations from operation. We estimate an average capex differential of $600K. Adjusting for load factors, the relative capex saving of a rail container is ~$400K. Rail assets also carry a longer useful life of 10 years, versus line haul trucks at 5 years.
- Rail container investment can save an incremental $80k in lease payments per annum, per container. Thus, the strategy is accretive to free cash flow for the group, as well as improving safety and environmental outcomes, both important KPIs in customer decisions. We see growth in the number of rail containers to 479 by the end of FY23e.
- Rural and transport service offering forms a customer lock
- Lindsay is the only national pure play rural operator servicing the horticultural sector. Rural operates as an independent purchaser with major packaging, chemicals, nutrient, fertiliser, and irrigation/piping suppliers locally and abroad. Execution of a major geographical expansion strategy means that the company now services most core horticultural growing regions across Australia, excluding the Northern Territory and Tasmania.
- The combination of the rural store footprint with the size and scale of the transport operations, provides synergies in customer service, asset utilisation and cross selling opportunities across the broader group. We estimate that the Lindsay Rural and Transport segment services ~800 complementary grower customers. This is equivalent to 40%-50% of the repeat rural customer pool. The co-location of many rural and transport franchises, combined with specialist agronomy services offered to growers, benefits the combined operations in key areas:
- The model gains insights into customer planting and associated harvest timing and profile. Natural duplication in relationship building and whole of customer pricing strategies, facilitating market share growth.
- The transport segment provides capacity to deliver rural goods to customers in a timely fashion and supports backloading of prime movers on return freight, an important profit margin driver.
- The combined operations provide insights and opportunities to launch new services in response to market trends. An example of this is the horizontal extension of the business model to include Lindsay Fresh (LF).
- LF is an import/export transport service opened within the Brisbane produce markets in 2015 in response to demand from existing customers to gain exposure to offshore markets. The company has extended its packaging supply partnership with Visy group for 5 years from 1 January 2021. We estimate that Lindsay procures ~$30m in packaging material from Visy per annum and growing.
- Expansion strategy is strengthening the combined model
- Investment in new transport and rural facilities, including cold storage and warehousing in Perth, Adelaide, Mildura, Brisbane, Mareeba and Bowen between FY15 and FY20 has extended the service footprint and improved the quality of revenues across the company.
- Expansion strategy has broadened the level of exposure to core growing regions - the Atherton Tablelands, Burdekin region, Adelaide and Riverlands, Murray and Perth catchment zones. We believe that this strategy has delivered benefits in terms of:
- Reducing the reliance to SE Queensland and Northern NSW;
- Smoothing the timing of fruit and vegetable harvests across regions which evens the demands on the transport fleet throughout a given year; and
- Diversifying the exposure to particular seasonal events and weather patterns.
- We also see a major benefit from servicing a larger catchment zone of customers. This widens the capacity to service a greater number of corporate and grocery customers nationally, with associated benefits to origin and destination and return journey freight.
- Leveraging scale creates barrier to entry and cost efficiencies
- Growth in the size and scale of the operation continues to provide benefits to cost economics on equipment, subcontractors, leasing, and other input costs with key suppliers. We believe that Lindsay’s cost to serve is within the lowest cost quartile of the food and horticultural transport sector.
- The size of the fleet provides a major barrier to entry for other entrants looking to win share with major accounts. Safety and compliance continue to be a key area of focus across the industry. The scale of the Lindsay operating model and adoption of best of breed traffic management system Truckmate (by TMS) and extensive investment into safety and compliance continues to keep the company at the forefront of best practice.
- Financial metrics are sound, with upside potential
- Lindsay Australia generates solid financial returns by industry standards. Returns on invested capital of 6.1% (pre-tax) rank in line with industry comparables KSC, CLX, and QUB (ex Moorebank). We believe that this provides validation of the benefits of the combined rural and transport segments, diversification strategy and market position in refrigerated transport. LAU records lower historical ROIC versus international peers, we believe linked with reduced levels of scale and operating leverage and variances in the cost structure.
- Industry benchmarks in the US, suggest that LAU are generating an acceptable level of revenue per prime mover, albeit can generate higher profit margins on its transport revenue mix. Excluding the impact of AASB 16, we estimate ~12% EBITDA margins on the transport business and ~5% EBITDA margins on rural revenues. We see an EBIT margin target range of 7%-10% as an appropriate medium-term target, based on returns generated by industry comparables Schneider, Marten and JB Hunt in the USA.
- We see potential for higher utilisation on Lindsay’s asset base, operating leverage and potential to capture higher prices as levers to increasing average operating income/prime mover.
--- For the full report - including charts, diagrams, financial metrics, forecasts, cash flow analysis, balance sheet analysis, sector analysis, and much more, click on the link at the top of this straw ---
Here's one more section that is relevant in that we have been discussing cold storage and cold chain transportation/logistics here (on Strawman.com) in relation to vaccines, particularly COVID-19 vaccines:
Recent M&A activity in the cold storage sector
The cold storage industry has been subject to M&A consolidation activity, highlighted by several recent transactions as follows:
- In February 2020, private equity fund Anchorage Capital Partners acquired AP Eager’s refrigerated logistics businesses at an enterprise valuation of A$75m (adjusted by $20m from the purchase price). The division is comprised of four brands – Rand Transport, Harris Refrigerated, Scott’s Refrigerated Freightways and JAT Refrigerated Road Services. At the time, the division comprised 24 cold storage facilities across Australia, serviced by 1,800 trucks and 500 rail cars.
- In November 2019, Lineage Logistics – the world’s largest provider of temperature controlled logistics solutions – announced the takeover of Emergent Cold for approximately AUD$1.3bn. Emergent Cold itself had previously engaged in M&A activity in the sector with the purchase of Melbourne-based Montague Cold Storage in 2018, Swire Logistics in 2018 and Oxford Cold Storage in 2019.
Higher intermodal units reflect demands for refrigeration
- The Australian Department of Environment and Energy prepares data on refrigeration including estimates on road and rail transport refrigeration units. We consider the Trailer, Intermodal category the most relevant to Lindsay’s market which includes transport refrigeration units (TRUs) used on articulated trucks and trailers as well as intermodal (road or rail) containers.
- The data highlights growth in this category from 6,300 units in 2012 to 12,000 units in 2019 at a CAGR of 9.6% reflecting growing demand for refrigerated freight. This trend was replicated across non-intermodal refrigerated road transport.
[Chart of Australian refrigerated transport vehicles, 2012, 2016, 2019, showing growth trends]
--- Click on the link at the top for the full OM report on LAU ---
[This is another one I like but do not hold. Transport and logistics is just a tough business and the margins tend to be low. It is also very capital intensive. If you can keep the majority of your truck fleet on the road and moving freight around profitably then it can be OK, but it's not the sort of business that's going to shoot the lights out. Their focus on cold chain logistics (storage and transportation) is likely to provide them with an edge or a competitive advantage, and that is certainly positive. However, I do not personally consider LAU to be one of the best opportunities available to me in the market right now. They may suit some others however.]
