Description

Logistec is a leading marine services provider, with cargo handling operations in 90 terminals and 60 ports in North America.  They also have an environmental services business that provides underground water main renewal services, site remediation, contaminated soils management, etc.

The company has a very strong track record of growth, with both revenues and EBITDA growing at a 14% CAGR over the last ten years.  Growth has been driven by a combination of organic growth and the acquisition of smaller independent cargo handlers.

Despite the company’s strong performance, shares trade at a low valuation of only 6x EBITDA and 10x FCF.  Importantly, less than two months ago in May, the board of directors announced a strategic review in response to the company’s controlling shareholder expressing their desire for a liquidity event.

I believe that Logistec is worth roughly $100 per share, which would value the company around 9x EBITDA and 17x FCF.  Furthermore, I believe that the strategic review represents a hard, near-term catalyst to unlock value for shareholders.

Shares trade as LGT.B on the TSX and LTKBF on OTC Markets in the US.

Marine Services

The company’s primary business is providing bulk, break-bulk, and container cargo handling in 60 ports and 90 terminals across North America.  This large network of terminal and port assets covers the Great Lakes, Saint Lawrence Seaway and both the Eastern and Gulf coasts. They are strategically located near major highways and rail infrastructures and represent the company’s largest competitive advantage.

The company also offers marine transportation services that are geared primarily to the Arctic coastal trade through their Transport Nanuk joint venture.  They operate five ice-classed vessels, and are primarily active in the eastern Arctic during the summer and fall.

Finally, they also offer marine agency services to foreign shipowners and operators serving the Canadian market.  Services include obtaining pilot services, coordinating port calls, attendance to crew requirements, and various other services performed on behalf of the owner and/or operator of the vessel.

In total, Marine Services comprises around 80% of EBITDA.

Environmental Services

While the Environmental Services segment is not quite as attractive as their crown jewel port and terminal infrastructure assets, it has still been a good business for Logistec and grown over time.  Importantly, they closed Q4 with the highest project backlog in their entire history, and so I believe they’re poised for a strong year in this segment.  Environmental Services was relatively weak for them last year as they had a number of projects canceled at the last minute which impacted profitability.

There are essentially two different businesses in this segment.  

The first business is largely site remediation and soils and materials management through their subsidiary Sanexen.  I believe this work is fairly concentrated in the province of Quebec.

The second business is the renewal of underground water mains, where they essentially remediate existing water pipes by inserting a durable liner into them.  This serves to both extend the life of the water mains as well as protect the water from lead contamination and leaks.  Not surprisingly, it is cheaper to remediate the pipes in this manner rather than perform a large excavation.

In total, Environmental Services comprises around 20% of EBITDA.

Valuation

I have valued the company by looking at forward (next 12 months) EBITDA and FCF.  

Logistec just closed on the largest acquisition in their entire history – Federal Marine Terminals – at the beginning of Q2, and so my estimates incorporate a full year of operations of this business.  FMT is a port services business and expanded the network by adding another 11 terminals.  They acquired this business for $105mm USD and it generated $90mm USD in revenues last year with gross margins similar to Logistec’s marine services segment.  

I have modeled $24mm in EBITDA from this business, which corresponds to a 20% EBITDA margin.  I feel this is quite conservative as it does not assume any revenue growth and because the margin is 500 bps lower than the 25% EBITDA margins that Logistec’s Marine Services business generated last year.  Furthermore, management stated on the conference call that they expect both revenue synergies and margin expansion due to cost synergies.  

Until management provides more financial details about this new business, however, I feel it is prudent to be more conservative than usual.  A $24mm EBITDA estimate also corresponds to an acquisition purchase price of 5.8x EBITDA which seems in the right ballpark to me.  If the revenue and cost synergies that management has hinted at are achievable, it’s not hard to see how EBITDA could be even higher and turn this acquisition into a significant home run.

I modeled $156mm in EBITDA for the rest of the business, which is ~12% higher than the $139mm they’ve generated in the TTM.  In total that gets you to $180mm in EBITDA.

As for FCF, I subtract $29mm in interest, $33mm in maintenance capex, $19mm in lease payments, and $21mm in taxes, which gets me to $77mm in FCF.

Using these estimates puts the valuation at roughly 6x EBITDA and 10x FCF.

I believe the business is worth around $100 per share, which would put the valuation around 9x EBITDA and 17x FCF.

Why Is The Stock So Cheap?

Logistec shares are unusually cheap for such a sizable business (~$180mm in EBITDA) that has already announced a strategic review.  I think there are a number of reasons that have caused this opportunity to fly under the radar for so long:

• It’s a family-controlled business with a dual class share structure.  This I’m sure gives many investors pause, but I have no issue with it here for the same reasons as ADF Group (and which I noted in my report on that company).  The family has economic ownership that is both significant in the absolute (45% of the company) and relative to their salaries.  I have not seen any evidence of management trying to abuse its voting control.  Finally, the company has been historically very well run IMO, and some might even argue that has been because of its family control rather than in spite of it.

• No sell-side coverage.

• Virtually no investor relations.  For most of the company’s existence there was essentially zero investor relations and no earnings conference calls.  It seemed like things were starting to change last year with a few conference calls and an investor slide deck, but in Q1 there was once again no conference call.

• The company has two very distinct and unrelated businesses, neither of which has many pure publicly traded comps to aid with analysis.

Strategic Review

Logistec was founded by Roger Paquin in 1952.  His three daughters (Madeleine, Suzanne, and Nicole) now have 45% economic ownership (equally split) and 77% voting control of Logistec via Sumanic Investments.  Madeleine Paquin is the CEO and all three are on the board of directors.

On May 19th, Sumanic Investments “informed the board of directors of the corporation of its interest in considering the sale of all or part of its shares in the corporation and desire for the corporation to initiate a process to pursue a strategic transaction in the best interest of all stakeholders to maximize shareholder value.”  In response to this request, “the board of directors of the corporation has formed a special committee of independent directors to consider Sumanic's request to review the strategic alternatives available to the corporation, including a potential sale transaction, and make recommendations in that regard to the board of directors.”

I believe this strategic review is very notable because it represents a hard, near-term catalyst to unlock value for shareholders.  While the outcome is obviously uncertain, I believe this strategic review has a high probability of resulting in a liquidity event.  The company appears to be essentially putting itself up for sale at a time of strength – their businesses are all performing strongly, and they just closed on what appears to be a large, highly attractive acquisition.  The vast majority of the value, which resides in the Marine Services segment, would have a particularly long list of potential suitors.

Risks

• The strategic review results in no transactions.  While this would be disappointing, I don’t think the share price reaction would be quite as dire as I’m sure many investors fear.  While shares appreciated in price when the review was announced, I believe they remain at a much larger-than-typical discount to potential sale price.  Furthermore, regardless of what happens, I think the genie is out of the bottle now.  Should a transaction not be reached, I think most investors would assume it’s due to the general economic environment and that they’ll just put themselves up for sale when the deal window opens again.

• Economic activity weakens and Marine Services revenues and EBITDA consequently decline.

• They encounter difficulties integrating Federal Marine Terminals and/or the revenue and cost synergies fail to materialize as expected.

Catalyst

Completion of the strategic review, potentially resulting in a sale of the company in whole or in parts.