Description

ACLN is a very rapidly growing specialty shipping company based in Antwerp. The company is traded on the NASDAQ TK: ACLNF. The stock has moved up nearly 50% over the last several months and more than 100% over the last year, but still represents a tremendous value relative to a variety of traditional valuation metrics (especially considering its growth).

ACLN ships new and used vehicles from Europe to North and West African countries. They take advantage of the "backhaul" opportunity created by empty Japanese carriers that have delivered new cars to Europe and are headed home to Asia. The company produced about US $200mm in revenue in 2000 and made $42mm in net earnings, representing growth rates of more than 70% and more than 90% over the prior year. Further, the company's net income increased by almost 60% for the first quarter of 2001 to $13.7mm from $8.7mm in Q1 2000.

Why does ACLN exist?

There aren't any used cars in Africa, which, believe it or not, has a growing middle class. Middle class africans get on a plane and go to northern Europe, buy a car and ship it home. This presents somewhat of a logistics nightmare for many Africans given there are some shippers of ill-repute, customs issues, cash conversion issues, tarriffs, timing of deliveries, etc. ACLN has structured this process for each of the ports to which it ships in north and west africa. They have developed the reputation for being the "coca-cola," if there is such a thing, of the Europe to Africa shipping route. They take care of all of the logistic and legal processes. ACLN achieved its reputation by providing receivables funding for its customers (they didn't have to release funds from escrow until the car was delivered in Africa). This provided ACLN with tremendous growth opportunities as it eliminated the "integrity" concerns that are associated with international shippers. ACLN does NOT provide such credit anymore. The company doesn't need to, as they have developed such a strong reputation for credible dealings.

ACLN got its start as just a logistics company. They contracted with many of the backhaul Asia-based shippers to COMPLETELY FILL the ships on they way back to Africa. This provided ACLN with huge economies of scale, given that the alternative is to ship your car on a boat with everything from bananas to fertilizer. The shipping alternatives are ACLN or someone else. ACLN's pricing policy is to price just below the banana boat guys. It's almost a no-brainer for the customer.

ACLN has expanded from pure logistics to acquiring new and used vehicles themselves and taking on the inventory risk. As a result, their growth has continued to accelerate. While I believe this increases the risk, they have a policy of "pre-selling" all vehicles before shipment. So at least they don't have the risk of shipping a used car that they don't know will sell (they don't increase the "at risk" capital by the shipping cost).

The average vehicle purchased by a North or West African is $3,000 to $5,000 and 5 to 7 years old. Imagine a 94 Ford Taurus or equivalent. The great thing about the African market is that there is no market for new cars, so there are no used cars. Further, there are no parts and the service life of a vehicle in Africa is probably half that of Europe. This presents an opportunity for follow-on sales after 3 or 4 years as the cars will be completely worn out and need to be replaced.

It's not my favorite use of capital, but to further accelerate earnings growth, the company is buying some of its own ships. Their cost with their own ships is about half of what it is using another's. Their return on invested capital in ships is in the range of 20% to 25%.

ACLN is a tax-free entity. They pay no corporate income taxes.

If you assume a growth rate of 30% (to be conservative; this is approximately half of their actual current growth of 60%) and assume it decreases to about 20% over the next five years, and a terminal multiple of 8x, the company's current equity value is $1BB. The stock is currently at $400mm. Using less conservative growth rates (like their actual growth of 60% plus), you can easily justify a current value of $1.5 to $2.0BB. Even a moderate earnings multiple, especially for a company growing at 60% plus, of 20x gives an equity value of $800mm plus. Also, the company's cash flow is nothing short of awesome. They are able to achieve all this growth and produce unbelievable amounts of cash. BTW, the above DCF penalizes cash flow for all cash spent on new ships. This argues a price to value of 30% to 50%.

What I don't like:
1) it's a business that two guys, a dog and a white board could get into. The barriers to entry are low. Their marketing and reputation provides some level of brand "moatedness," but realistically anybody can be in the shipping business. At some point, some of the large int'l carriers will notice these margins and start to think about taking some of this business away from ACLN. Having their own ships helps protect from any "supply arrangements, as their suppliers may get together and decide to take a little more margin as well. Considering ACLN ships full ships to africa, a potential competitor will have to be willing to suffer some losses as a result of lower efficiency levels. In other words, they'll have to be committed to getting into the business.
2) Economic uncertainty in Africa. Africa as a whole is an economic wild-card. Recently there has been economic growth, but the political instability is still a major problem. The primary protection here comes from the diversification across multiple countries. ACLN claims there is something like a 2% middle class in Africa and that the vehicle penetration rate is less than 10 basis points. There should be lots of growth opportunity, but these numbers are hard to verify. There's just not much economic data on africa.

I'm a new poster/member, so thanks for listening. Let me know if you have any questions.

-the pelican

Catalyst

At some point continued tremendous growth in earnings and cash flow will be recognized by Wall Street analysts that can't find any more high growth tech companies. Hopefully, for us, at some point they'll over-value ACLN just like every other high growth company that gets way over-valued.