By Craig Martin
There are two very clear developments that have played out over the past quarter and that may in fact become the “new normal” for some months to come.
The first development is that one would expect that lower petrol and diesel prices could be here for a little while longer. The brent crude price of oil has dropped significantly, mainly as a result of increased supply. Provided that the Rand behaves itself against the greenback, I expect that these lower fuel prices could continue for sometime, which would benefit companies involved in transportation and logistics.
Secondly, we’ve experienced ten weeks of SA Post Office strikes in this country. At the same time, post office workers are demanding permanent employment contracts, government is looking at departments that can either be privatised or rationalised. The Star newspaper recently reported on R2,1bn irregular expenditure at the Post Office, whether or not this figure is overstated is not as important as the fact that the moving of letters and postcards has become almost irrelevant as more people use technology to communicate.
However, parcels still need to be moved and during the past few weeks I have had two urgent parcels delivered to me that would have probably gone through the SA Post Office, but now came to me via PostNet.
PostNet is a retail subsidiary of JSE-listed company Onelogix Group Limited (OLG). This is a very small part of the group that generates revenue from franchise fees – coming in at just R32m, for year to end of May 2014. However, operating margins are very good at 44.8% and this part of the business holds no real risk for Onelogix. I think these strikes have assisted PostNet in finding growth from not only new business, but also interest in new franchised sites. The average cost to setup a PostNet store is R575k with 50% unencumbered. Considering that this franchise concept doesn’t require purchasing perishable items, but rather capital equipment and it is more service orientated, it does have a lot of appeal to potential franchisees.
The primary business (91% of revenue) of OneLogix is actually specialised transport and logistics. So they operate in that area that is likely to enjoy the benefits of lower fuel costs. Due to increased competition and prior periods of fuel increases, OneLogix and most of its competitors have been experiencing a squeeze in margins. We anticipate that this could now unwind and operating margins of 10.5 and higher could become a reality again.
OneLogix transport business grew from when it first established VDS in 1988, which stands for Vehicle Distribution Services and that is essentially what this company does, it moves vehicles for Porsche, GM and other customers from port to dealers. In a sense this business is a leading indicator of vehicle sales and considering that vehicle sales have been contracted and we expect it to remain muted in the months ahead, this may be a negative for the group in the short-term. On the other hand, the company does haul extra heavy duty vehicles and unit sales of these vehicles have been buoyant.
The potential growth on the African continent could be good. Ford, for example, plans to launch 25 new vehicle model upgrades into Africa and the Middle East. While OneLogix does operate on the African continent, it is my view that they may have moved too slowly and might not be able to catch-up to other competitors who are already quite established across the continent.
Another headwind is that Transnet seem to be getting their act together by adding new rail links and new locomotives and this railway infrastructure is being linked into the ports, most notably Durban harbour. The South African government is keen to have fewer large haul trucks on our roads and ultimately Transnet could offer a lower cost alternative that Onelogix clients may opt to utilise. Having said that, OneLogix is committed to public private partnerships with Transnet and may be a beneficiary, but overall there seem to be more potential negatives than net positives.
I recently found myself rereading one of Jack Stack’s books. He advocates “building a culture of ownership for the long-term success of your business.” One of the ways that he advocates this is through giving management and employees a share in the business. One cannot help but feel that the Board of Directors at Onelogix are familiar with the advantages of this stategy. In October last year, the group disposed of a 10% shareholding in Projex to the Projex management team for R9 million through a financing agreement. The purpose was to better align the interests of management and shareholders. Then in December they repurchased all its shares held by Izingwe Holdings, its then BEE partner. Management then opted to put in place a share participation scheme, which would effectively give employees an opportunity to have an ten percent indirect shareholding in the group.
Incidentally, Projex is a significant player in the Durban harbour freight logistics market focused on project managing the movement of large shipments of abnormal or general freight within tight deadlines. The company also took a 51% stake in Madison which complements Projex’s offering, but it is more inland focused. Finally, the company created a start-up called Linehaul in November 2013 and this company specialises in cross-border movements of commodities and general freight.
There are a number of other parts to the company, such as DriveRisk (40% owned), which is a solutions company offering technical solutions for fleet owners and operators. The company also have a panel beater workshop that is focused on commercial vehicles, called Atlas360. This company services its own vehicles and seems to be enjoying good growth with other customers as well.
OneLogix purchased a large tract of land between Durban and Pietermaritzburg which I have called the Umlass Road project. It was purchased for R69,2 million, to develop a major storage facility for VDS and for offices, workshops, fuel tanks, driver accommodation and truck parking. While this may be a earnings enhancing in the long-term, it will have a working capital drain on the company in the short-term and will increase company liabilities.
It is one thing being able to grow earnings, but it is always pleasing when earnings are covered by good cash-flow. Over the past six reporting periods (that was as far back as I went in my analysis), every single year the company’s cash-flow exceeded its operating profit. So, for example, in 2014 cash flow was R133,4m against operating profit of R132,9m and in 2013 cash flow was R97,4m against operating profit of R92,5m.
Overall, management seem to have been successful in making small entrepreneurial acquisitions and successfully absorbing them into the group. The company is very cash generative and have created barriers to entry due to the niche areas of logistics that it operates in.
A return on equity of more than 24% (which was been consistent over the past few years) is certainly very attractive as is the company’s ability to generate cash. 2015 results are probably not going to disappoint, but the lower fuel prices and the potential for growth enjoyed from Postnet will now just add a kicker to those figures.
I have tried to objectively present the positives and negatives in the story, but overall on a forward PE of around 12.5, OneLogix looks compelling.
