After reviewing H2 FY24 results, sadly I think my thesis is busted for Silk Logistics.

They may still come good over the next 5 years and things possibly get better from here but I am no longer confident this has a high probability of beating the market in the foreseeable future.

Key issues below -

• ROE/ROC are trending down and are now below 10%
• Debt levels continue to grow and the interest payments have nearly doubled YOY, dragging on EPS.
• Depreciation is up 50% on a couple of years ago which is also dragging down EPS
• Despite them working hard at it, the warehouse utilisation rates have dropped down to 75% and don't seem to be improving yet
• Operating expenses keep growing at the same rates as revenue, so they aren't gaining efficiencies yet
• One of the founders who was CEO had to leave the role this half due to health reasons, which has weakened the leadership group
• As a result of much of above, despite revenue doubling since listing, EPS hasn't quite doubled and the balance sheet is proportionally riskier now.

May come to regret selling at a low point but given what the trends are, I will be more disappointed if I don't exit on a broken thesis and take even bigger losses down the road.

I attended the AGM yesterday and overall was very happy with the interactions. In my view the company is well ahead of most similar size listed businesses when it comes to governance. It’s a skilled and capable Board. The rem plan is well aligned with shareholders and incentivises sustainable growth. They didn’t use discretion this year to pay out short term incentives despite getting close to the targets. The Board and management seem well aware of cyber risks and are pro actively working at mitigation. They are measuring customer satisfaction with NPS and injury rates are roughly 80% below the industry average. Not a perfect business as none are. They cancelled the expansion project in NSW this week as they couldn’t complete the deal on mutually favourable terms. However given the current market cap and short time as a listed business they are very well set up for a successful and sustainable future and the valuation upside is in tact in my view.