Xpediator Plc is an integrated freight management business operating in the supply chain logistics and fulfilment sector across the UK and Europe with a particular focus on, and expertise in, CEE countries.
Back to basics is paying off
The results from Xpediator for the six months to June were extraordinarily good. Revenues declined just 2.7%, with gross and operating margins modestly ahead - and this from a company with considerable exposure to the consumer.
The results highlight the entrepreneurial nature of the business: new business was won and the utilisation of the Group’s Transport Solutions clients to find the best routes and rates when the pandemic closed several CEE borders. In addition, the dividend was increased by 61% y-o-y which highlights confidence in the outlook.
The Freight Forwarding business was the star performer, with the Baltic region and Bulgaria delivering extremely healthy top-line growth. Rationalisation of the cost base commenced during late Q1, removing some of the excesses of 2019, particularly at the centre, but also reflecting declining activity levels as the pandemic began to bite.
With headroom from bank facilities, coupled with cash reserves, the group is well placed to target further acquisitions. In our opinion the shares are too lowly rated relative to opportunities, and underpinned by the NAV (19.9p).Download Now Missing Out Get our research first
Back on track
The latest update from XPD reads well. Trading volumes have almost returned to pre-COVID-19 levels, aided by the breadth of coverage across Europe. Meanwhile, the cost base is permanently lower, following swift action at the start of the crisis.
Cash levels are higher than at the same stage a year ago standing at £4.2m end of June, only behind year-end levels owing to the payment of deferred consideration. Such is the confidence within the business that management ended the voluntary pay reduction scheme a month earlier than initially anticipated.
Activity in the UK was harder hit because of the COVID-19 pandemic, yet parts of Central and Eastern Europe only saw modest disruption. Ahead of lockdown there were issues across several UK businesses which management were already dealing with. Strong performances, relative to the remainder of the Group, were evidenced in Lithuania, Bulgaria and to a lesser extent, Romania. Freight Forwarding and Pall-Ex Romania have fared particularly well.
While it remains too early to reinstate estimates, we remain encouraged by the improving trading levels, the permanent lowering of the cost base and action to put out fires. The shares are strongly supported by cash and the NAV.Download Now Missing Out Get our research first
Changes to the Board, but not in strategy
Xpediator has announced several management changes. Stephen Blyth, current CEO and Founder, is to become Non-Executive Deputy Chairman, replaced in the interim period by Joint-CEOs. Encouragingly, XPD has managed to retain Stephen’s expertise, energy and perhaps most significantly, his vision. He will also Chair the new M&A group and be a member of the audit committee.
While a formal process is underway to identify the new CEO, the Board has appointed two Interim Joint-CEOs in Robert Ross, currently the Group’s CFO, and Danor Ionescu, the current Group COO of Logistics in Romania. Both have been effectively running the operations for some time.
The recent trading update (26 May 2020) was encouraging, highlighting a relatively limited top-line impact from the COVID-19 disruption. Margins have remained broadly unchanged, reflecting the action on costs taken during Q1. Management also stated recently that the M&A pipeline remains strong, focused on both a widening of the Group’s geographical reach and air and sea transportation.
We do not expect the changes to result in any disruption and still regard XPD shares as strongly supported by the encouraging trading, the net cash (c. 20% of the market capitalisation) and the NAV of 21p/share.Download Now Missing Out Get our research first
Positive AGM update
While there has been a degree of disruption due to COVID-19, this has been less than management expected and mostly offset at the margin level by the action taken on the cost base during Q1.
Furthermore, the M&A pipeline is healthy and likely to grow further in the current climate; and we are encouraged by the H2 bias to trading, the action taken on costs and only a modest reduction in margins.
In summary, the UK (2019: 42.1% of revenues), Italy and Spain were the worst affected regions in the period. However, this was not universal with e-commerce, temperature-controlled shipping (food and hygiene product distribution) and stationery (home office/schooling) all performing well.
The Group’s operations in the Baltic states and Central & Eastern Europe (“Baltics” and “CEE”, 57.9% of revenues) performed well, reflecting lower impact there of COVID-19. Freight Forwarding and Pall-Ex Romania fared particularly well, exceeding initial expectations.
Note also that the Freight Forwarding division is asset light, acting as a broker, and therefore does not have vehicles or drivers standing idle. Where shortages have occurred and prices risen, the Group has been able to pass those cost increases on to customers.
We maintain our view that the net cash, NAV of 21p/share and the resilient trading to date offer a high degree of comfort, underpinning the stock in the current environment.
Reassuring outcome and actions
Preliminary results to December 2019 were ahead of revised expectations across several metrics, not least revenue, profits, net cash and the dividend. 2020 started strongly, albeit trade was then affected by the COVID-19 related measures during March, meaning that Q1 trading was in-line with expectations.
Steps have been taken to conserve cash and to reduce costs, with the final dividend payable in shares during Q3. The Group’s strategy continues to be ambitious, targeting organic growth supplemented by acquisitions and the pipeline for the latter is reported as strong.
FY20 started well, with Pall-Ex Romania continuing to deliver 20% volume growth and the Freight Forwarding division performing strongly in the CEE region. But activity slowed across most areas during March as the COVID-19 related restrictions took effect. More recently, the Far Eastern and Chinese businesses began to recover towards the end of the quarter following an understandably difficult start to the year.
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We continue to be encouraged by actions on costs, the resilient trading, a healthy net cash buffer and the payment of a final dividend. Indeed, the dividend highlights Management’s confidence in the medium-term outlook for the business. The shares are well supported by the Group’s net cash (18% of the market capitalisation) and its NAV of 21p per share.
Cash rich, asset light
Planning ahead and removing bottlenecks
Out with the old..
Cost of growth
Investing for growth
Free cash flow yield high
'Significant growth' confirmed
Xpediator’s pre-close trading update said that revenues and profits are both in-line with market expectations. Top-line growth was significantly ahead, rising 54% y-o-y to c.£179m (c.1% ahead of ED estimate), while profits have more than doubled to c.£7.1m. The uplift to revenues has been driven by organic growth, most notably in Freight Forwarding (Baltics and Balkans), Pall-Ex Romania, and Affinity. Plus, there were benefits from the acquisition of ISL and Anglia Forwarding in 2018, and Regional Express in late 2017.
FY2018F proved eventful, with two acquisitions made and strong organic progress witnessed across much of the Group. The acquisition of Anglia Freight in June and ISL in July added approximately £21m of revenues, accounting for c.18% of the y-o-y increase. The wider group has benefitted from the sea and air freight capabilities, wider customer base and service offerings added
The significant improvement in revenues in the Group’s operations in the Baltic states and the Balkans, despite challenging comparatives, reflects the continued development of the customer base within the Freight Forwarding division and the rising revenues from Greece (via the Group’s Bulgarian operations).
There is a comprehensive investment programme underway during FY2019F, which is likely to boost central headcount. There will be further improvement in systems and expansion of the warehousing footprint. We think this is likely to have a small short-term impact on margins in FY2019F, but then resulting in ongoing improvement in returns as early as FY2020F onwards.
Management has suggested that the acquisition pipeline remains strong, as do the opportunities for organic growth. With approximately two-thirds of revenues generated outside of the UK, we believe that the share price has recently over-reacted to Brexit uncertainty and as a result consider it on attractive valuations currently. Xpediator’s shares are now at a FY2019F PER of just 10.9x and well below our valuation of 85p.Download Now Missing Out Get our research first