TransForce’s latest results are uninspiring

Canada’s TransForce released a trading update last week that was something of a mixed bag.

Its second-quarter results could make the case for TransForce being on the right track in terms of cash flows generation – but as the macroeconomic headwinds continue, value creation could become an increasingly uphill struggle unless the company becomes more aggressive and finds ways to grow its assets base inorganically.

Revenue, EBITDA, core margins and net earnings all fell significantly year-on-year in the three months ended June 30, as well as over the course of the first half of the year. However, there is also good news in that operating cash flow rose, strengthening in the second quarter, and this is an important factor given its significant debt load.

It said that in the second quarter the company’s long-term debt decreased by C$29.1m to C$853.5m, mainly due to solid cash flow generation from continuing operations, which implies a forward net leverage slightly below 2x in 2016.

That is unquestionably manageable, although certain costs have become heavier, as testified by an operating ratio rising 130 basis points to 93.6% against 92.3% in the first half of 2015.

Its quarterly performance was impacted by “the continuing negative effect from lower freight volume due to weaker economic fundamentals and lower oil prices”, the group said, adding that total revenue decreased 5% to C$903m, “mainly on freight volumes and fuel surcharge decreases, while operating income was down on lower year-over-year gain on sale of assets and revenue declines”.

Dividends are flat, but a significant cash outflow from stock buybacks continued during the six months ended June 30, 2016.

In the first half of 2016, it repurchased 2.1m shares at a price ranging between C$22.00 and C$24.25, “for a total purchase price of $49m”, while one year earlier it had repurchased 1,934,100 shares at a price ranging from C$25.27 to C$27.92, for a total purchase price of C$52.1m.

The group doesn’t have to compromise between dividends and stock buybacks at present, given a conservative pay-out ratio, but it may have to entertain more acquisitions to chase inorganic growth and boost its share price, which currently implies that earnings expectations for the year might be a tad too high.

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Source: Transport Intelligence, July 27, 2016

Author: Alessandro Pasetti