Acquisitions on the menu after TransForce divests assets and sees debt decline

Canada’s TransForce, a freight and logistics group with a C$2.2bn ($1.7bn) market cap, could once again be drawing up a list of possible acquisition targets to bolster its most profitable and cash generative divisions.

It acquired rival Contrans in mid-2014, valuing its equity capital at about $495m, but its shares have barely beaten domestic inflation rates over the past two years, excluding dividends. After a multi-year high touching C$31 in March 2015, its stock now trades at C$24, having just recovered from a three-year low of C$19 in early February.

Deal-making helped it deliver value in the past, and should not be ruled not now.

Its latest trading update on April 20 was only mildly positive and did little to boost its stock price. First quarter net revenues, which exclude fuel surcharges, rose 1% year-on-year to C$866m, while gross revenues dropped 3% to $934m due to lower fuel surcharges, which were down 36% to $67m in the period.

“Total revenue decreased by $29.4m, largely the result of decreases in fuel surcharge and volumes [which were] offset by business acquisitions and positive foreign currency exchange movements,” it said.

EBITDA fell 1% to almost $86m, while EBITDA margin was 20 basis points lower year-on-year, falling from 10.1% to 9.9%.

Operating income plunged 8% to $40m, although that didn’t hurt its bottom line, with diluted earnings from continuing operations coming in at $15m, up 18% against the same period last year. Diluted earnings per share are rising nicely, while dividends per share were unchanged, which indicates that TransForce’s capital allocation strategy remains prudent as it continues to strengthen its balance sheet.

“TransForce delivered its first quarterly results after the sale of its Waste Management segment,” the group said in April, adding that “in Q1, long-term debt decreased by $732.5m to $882.6m mainly due to the proceeds from the sale of the Waste group.”

Assuming annual EBITDA of $360m, its net leverage could fall to around 2x this year. And while net cash from continuing operations fell 15% to $40.2m, yielding a “$7.2m decrease” year-on-year, this was mainly due to changes in non-cash operating working capital.

The group also noted that “free cash flow (FCF) from continuing operations, a non-IFRS measure, was $24.7m; higher than the $18.7m generated in Q1 2015 due to lower net capital expenditures.”

Interest costs are down, and if it continues to de-lever the potential for TransForce’s return to the acquisition trail will increase. There will be a particular focus on the truckload unit, which not only is the main revenue driver ($338m of revenues, 38% of group sales) but also has a 14.5% EBITDA margin – some 500 basis point higher than that of logistics, its next most profitable unit.

The remainder of its assets portfolio comprises package and courier and less-than-truckload assets.

Source: Transport Intelligence, 01st June 2016

Author: Alessandro Pasetti