By Craig Martin
The performance of logistic companies, like Value Group (VLE) can be said to be linked to GDP growth, movement of goods and economic activity. However, one of their largest expenses is arguably fuel costs. In the first half of the year to the end of August, the Value Group indicated that fuel increased by an average of 10%, whereas now, petrol is back to the levels they were at the start of the year and diesel is even lower. Furthermore, we expect that fuel prices will continue to head in the right direction for land freight and logistics companies for some months to come.
Interestingly, the share price of Value Group has also been falling, having been knocked down from 700c a year ago (26 Nov 2013) to its current price of around 430c. There is good reason in that the first half earnings were really dismal, seeing HEPS fall 81% from 25c to 4.7cps.Unfortunately this was largely due to labour costs increasing by 8%, fuel costs by 10% and unexpected maintenance costs. However, the more important question should be around how the full year is likely to look.
Firstly, some background to the company, which started in 1981 as a small truck rental company and then listed on the JSE under the transport sector in 1998. Soon after listing, the company made a number of small acquisitions. The group operates in all nine provinces, as well as Namibia and Botswana It is part of a global network of forwarders, with agents represented in 170 countries, so essentially cargo can be moved to or from nearly any country in the world on a door-to-door basis. ValueGroup has a comprehensive service offering with a national footprint of more than 305,000m² of warehousing space and 27 depots around the country, a core fleet of vehicles and forklifts of more than 4 600 consisting of 1, 4 and 8 ton vehicles, 8 ton crane vehicles, 1, 4 and 8 ton fridge vehicles,12 ton rigid vehicles, 18 to 32 ton truck tractors with various trailers and various size forklifts.
It now boasts revenue of near R2bn, after passing R1bn in revenue for the first time in 2007. The value of non-current assets exceeded R1 billion in the last full year of operations. However, the market-cap is a mere R854m, with the share price trading very close to NAV, which is around 425cps.
Ironically, the part of the group that started it all, namely truck rental, has been in decline. Although management have indicated that measures have been taken to grow the revenue base and improve performance in this segment. They have also told the market that there is going to be a concerted effort to get the sales force operating on all cylinders.
Management also started the year by terminating non-profitable business and adjusting rates where necessary. A number of senior appointments were made in key operational positions to further manage and streamline processes and associated costs.
Management have committed to dispose of older vehicles that were costly to maintain and operate. Various operations and divisions are being restructured with smaller branches which house a number of business units, being consolidated under one operation. A number of new fuel efficient vehicles were procured to match the reduced volume requirements of the customer base and improved planning and routing tools have been implemented.
This is not a management team that has been resting on its laurels and I would expect that it will be able to achieve a surprising set of numbers in the second-half of the year.
Notwithstanding the drop in operating cash in the first half, Value Group has always been extremely cash generative and has never had a problem collecting on its debtor’s book. They attribute part of the lower cash generation to the fact that the August month-end fell on a Sunday.
As long as the company can continue to generate good cash, it will pay great dividends. Although HEPS for the first half was below 5c, the company paid a 5c dividend. I expect that if the second-half is good, management will make sure that the full-year dividend is strong and make up for the lower interim dividend (as they had previously paid 9c).
Management at the Value Group have always been fairly conservative, the Balance Sheet is very sound. Keep in mind that the company has not only had to absorb higher wage costs, higher fuel, but also toll-road fees. These costs cannot immediately get passed onto the consumer, especially in a competitive environment, and this is what I believe we saw in the first half of the year.
Now, my assumption is that Value Group will still manage to see at least 34c a share this year (hopefully more). My disclaimer is that of course I could also be horribly wrong.
However, if I am correct, due to management’s focus on costs and other initiatives, as well as fuel costs remaining lower for longer, I anticipate that 2015 will see surprise growth pushing earnings above the 68c it delivered in 2014. That implies that 100% growth from 2014 to 2015 is feasible.
If Value Group does indeed achieve 34c for the year, it would place it on a PE of 12.5 and a PEG ratio of just 0.12. Granted, this year’s lack of growth (although it isn’t over yet) means that it doesn’t truly follow the Jim Slater method of finding GARP opportunities.  In fact, to be fair, some would say that logistics companies go through cycles, and this is probably not a “growth” share at all, but as the name implies, a “value” opportunity. To be truly honest, all growth shares seem to be on high PE’s at the moment and I simply cannot find any low PEG opportunities out there (that aren’t cyclical) and so this is the best I can offer today.
