Value Investors Club / RADIANT LOGISTICS INC (RLGT)

Description

(apologies for formatting here but I couldn't get the graphics in any other way and for whatever reason the hyperlinks are still not translating properly)

Intro:

We’ve been involved in RLGT for many years (and plan to hold it for many more years). However, I still

think the stock is attractive as it has finally hit the inflection where network effects are driving increasing

volumes of “onboards”, creating organic growth and margin expansion while strengthening balance

sheet and internal cash flow can drive the roll up strategy without requiring external capital. With RLGT

now finally at institutional size, cost of capital will continue to decrease and the 40-60% valuation gap

versus larger peers should begin to compress somewhat.

At today’s $5 stock price you are creating ownership at 15x 2015 cash earnings or

cheaper than large peers), which I view as cheap for this rapidly growing, asset light, long term

compounder run by high quality “owner operator” CEO Bohn who owns 26.8% of the equity (pro forma).

RLGT’s cash earnings per share should continue to grow 15-20%+ and over the next 3 years I expect

RLGT will be 250%+ return with a few more smart acquisitions.

I think ultimately Bohn will build a $1.5b+ revenue business at $100m+ EBITDA and sell it for 15x EBITDA or more to a growth-starved large 3pl peer and RLGT stock will be a mutli multi bagger over the coming years.

RLGT’s Business:

RLGT is a third party logistics business that is effectively a large network of travel agents for freight

allowing businesses to outsource this component of their supply chain. It’s a simple business you

probably have already read about and instead of going into great detail: the latest RLGT call lays out the

numbers fairly succinctly and here is the last 10k with annual report.

Overall though RLGT is a great business and is improving rapidly. Last quarter revenue grew organically

+8.6%yoy and is likely to accelerate, margin expansion is driving earnings growth considerably faster and

the benefits to scale will drive an acceleration of ROE from here.

Please note that there is a lot of pass-through revenue that distorts the RLGT income statement so when

looking at the ratios I would encourage you to measure it by gross profit or you can of course calculate

out net revenue, although that is not easily accessible on capiq/bloomberg.

RLGT Roll Up Model:

For anyone new to the industry I highly recommend conway968’s solid writeup on RLGT from 2/2011 as

well as the 3pl series on Monte Sol Capital’s website.

There are two factors at work driving the opportunity both for RLGT to acquire, and for RLGT to

eventually be acquired. First of all the 3pl industry is very fragmented, with the largest players having

<3% market share. As a result there are hundreds upon hundreds of small logistics players in North

America.

Simultaneously, the deregulation that created this fragmentation occurred in the 1980 and organic

growth of international trade since (along with outsourcing this part of supply chain) spawned an

enormous opportunity that many entrepreneurial individuals seized upon. However in 2015 many of

those founders are now approaching 70 and many are looking for an exit strategy.

Given the average size of the “mom and pops” though, they don’t even begin to move the needle for the

large 3pl players like EXPE or CHRW though. Which is where RLGT steps in.

There are tremendous benefits to scale that make consolidation very economic. EXPD and CHRW

generate 20-40%+ ROE while smaller players like RLGT generate perhaps mid-teens and the tiny mom

and pops are much much less economic. As a result, the small players can routinely be acquired for 5x

EBITDA (becomes

see it in the economics of RLGT as it has scaled.

EBITDA as a percentage of Gross Profit has tripled since 2007 at the same time revenue has increased

dramatically. These dynamics put RLGT in the “sweet spot” of size and opex leverage, to eventually

build a company of material size that an EXPE or CHRW would be interested in acquiring.

I think there are three things in particular that make RLGT timely: the recent acquisition of Wheels

Group, the “inflection point” now achieved in scale which is driving accelerating opportunity and RLGT

stock now crossing a threshold of size where larger funds can get interested, which should hopefully

drive valuation closer to peers (who trade 4-5 turns richer).

Recent Acquisition of Wheels Group:

This is one of the larger acquisitions RLGT has done and assuming Bohn continues to execute well, will

be transformative.

First, this creates immense network effects as RLGT’s combined coverage from product, geography and

end market perspective has improved dramatically. RLGT previously was focused especially on time

sensitive, urgent shipments. While the margins on these are nice, expanding with Wheel’s end markets

of packaged goods and frozen/refrig products will stabilize revenue and opex leverage should more than

offset the gross margin optics.

Second, Wheels has grown revenue at 14%+ organically since 1988 with >50% of revenue in Canada and

has a top tier customer list with thousands of customers that can now be cross sold on RLGT’s full

product spectrum. Guidance offered assumes zero revenue synergy which I believe is overly

conservative.

Third, given early nature of the transaction, both revenue and cost synergy guidance seems extremely

conservative. While there will be less cost synergy than RLGT has historically enjoyed on the small

acquisitions, guidance for $3m is “slam dunk” and Bohn has already hinted on the calls he has plans for

more but is not disclosing. With >$350m of gross revenue and $11.5m EBITDA (CAD) I will be shocked if

there isn’t at least another $1-1.5m or more of cost synergy from back office, admin and IT

consolidation.

Assuming modest near term revenue synergies of $20m (gross) and $1.25m of additional cost out that

have not been publicly disclosed yet, that brings pro forma ev/ebitda multiple down to <7x.

Inflection point in scale and brand value as onboards accelerate

Recently RLGT has been onboarding at an accelerating rate with 7 stations having joined RLGT’s network

in the last 6 months. Here in San Juan, here in Orlando, here in LA, here in Fort Lauderdale, here in San

Diego, here in Boston and here in both Tulsa and Oklahoma City. This is driving organic growth and

helping RLGT take market share. Also, the economics of onboarding new stations and agents also

temporarily depresses margins, as for the first two months RLGT gives 100% of the margin to the agents

to incentivize and help them with the transition. This means near term margins are slightly compressed

from this impact and with the new, larger RLGT this impact will be less of an optics issue than previously

when RLGT was growing rapidly.

I think this demonstrates that the network effect of a large and growing network managed by a good

team is demonstrating value to the industry as smaller logistics players see the value in joining the RLGT

network. Excluding the March additions, these alone will add $1.5m+ in annual EBITDA and $25m in

revenue. I expect this to continue, and although RLGT is larger so the law of numbers applies here, the

economics of these are extremely compelling.

Simultaneously, RLGT has now reached a truly “institutional” size which will drive cost of capital lower.

The latest Wheels deal they did allowed them to expand their BofA facility to $65m and get a 9 year

term loan from Integrated Asset Management at 6.65%. While the $25m in 12% sub debt on the deal

makes my eyes water, it does ratchet down to 9.5% and overall the blended cost of capital on this deal is

cheaper than RLGT has ever had.

With this deal, the business has grown to $800m+ in sales and >$30m in EBITDA with much broader

diversification by end market, customer and geography. As this continues I believe RLGT cost of capital

will continue to decrease. At the same time, with EBITDA at >$30m annual run rate now organic cash

flow generated is enough to cover the cost of smaller acquisitions without material equity or debt.

Lastly, RLGT trades at steep discount to peers. While some of this is deserved due to scale and ROE

differences, as RLGT continues to grow it way out of micro cap purgatory I expect this valuation gap will

narrow.

Valuation:

Given the favorable economics of the 3pl industry, companies in this space trade at pretty rich

valuations. While I’m not really much of a “relative valuation” investor, I think that some of this makes

some sense. There is no “D” really in the EBITDA and the “A” is just customer relationship amortization

from acquisitions typically, so EBITDA is not far off of cash earnings. So the True cash earnings of these

businesses are typically better than the optics would have you believe. I’m not saying 16x EBITDA is

shockingly cheap but consider the cash flow dynamics and keep in mind CHRW earns >40% ROE…

As you can see above, RLGT’s large peers trade for an average of 16x EBITDA and 28x earnings. This is almost

twice what RLGT trades at, I believe this valuation gap is excessive and will narrow as RLGT reaches

market cap and business size escape velocity in 2015-2016.

While RLGT obviously is smaller and does not yet have the economics of EXPD or CHRW, RLGT is also

growing much faster and I believe will eventually be sold at a price with control premium and synergies

accounted for. I also believe that at sale point RLGT will likely be bought by an EXPE and that purchase

consideration will have some component of equity involved as EXPE will need to issue equity probably.

So in that vein, relative valuation is important from the capital allocation perspective of acquirer.

If RLGT earns a 12x EV/EBITDA multiple that is $7.60 stock or +52% near term upside on current

earnings.

RLGT End Game: 250%+ Upside

I think the long term math of RLGT is more exciting.

RLGT has guided that with the new platform they are seeing more compelling acquisition candidates and

expect to get to $1b in revenue run rate by end of 2015. With organic revenue growth, more

onboarding, sales synergy and a few acquisitions I think Bohn could realistically grow RLGT to a $1.5b

revenue run rate by the end of 2017. With op leverage from here, EBITDA should grow at roughly

double revenue on % yoy basis. At $1.5b revenue, with synergies from Wheels, some onboarding and a

few smart acquisitions, I would expect EBITDA >$80m .

Large 3pl players have routinely, over multi year periods, traded at >14x EBITDA. RLGT is obviously

smaller with lower ROE, but also growing faster with ultimate sale and control premium likelky. If we

use 13x EBTIDA on $80m of EBITDA that is $1.04B EV. Bohn has said 2.5x EBITDA is comfortable

leverage for this business, which means total debt capital of ~$200m at that business size. Obviously

part of the strategy is incentivizing partners and acquisition targets with equity ownership and earn outs

but that leaves $840m of equity value relative to the current RLGT market cap of $200m…..

So I’ll leave you to model the organic cash flow and equity part out as there are a lot of moving parts

and assumptions depending on how you look at it but even with some dilution, if my numbers are even

vaguely correct, RLGT could realistically be a 300%+ return stock over the next 3 years.

I would also note that RLGT is being built to eventually sell. With big players able to issue equity at 16x

EBITDA and considerable synergies to any acquirer of RLGT, buying RLGT at 14x would be a very

economic transaction.

If I had to pick just a handful of stocks I wanted to hold for the next 5-10 years without the ability to

monitor or sell them, this would be one of them. I think ultimately what will happen is Bohn will build a

$1.5b+ revenue business at $100m+ EBITDA and sell it for 15x EBITDA or more to a growth starved EXPE.

If the stock pulls back violently for some reason, he will initiate a huge buyback, and if the stock trades

up he’ll use it as currency to do accretive acquisitions. Depending on how you model this yourself, this

should generate 40%+ cagr over a multi year period. If Bohn slips up and an acquisition goes badly he’ll

buyback stock or the whole company will be acquired.

I think it’s easily another double or better from here over the next 2 years barring global recession.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts:

-Current earnings power will flow through the income statement in 2h 2015 and become easier for

funds to “see” driving stock higher

-More accretive and value generating acquisitions will be done

-Continued 20%+ organic earnings growth

-RLGT share buybacks

Risks:

-This is primarily a roll up for the upside numbers, that carries integration risk. I think Bohn has had

some huge homeruns as well as some legendary mess ups, he is very well versed on what it takes to do

this correctly and his huge equity ownership should provide plenty of motivation to do this properly.

-In a global apocalypse, shipping volumes will likely decline, although working capital is a benefit to 3pl

players like RLGT in that scenario

-Bohn was burned not long ago on an acquisition that went badly, that could happen again. My

perspective is this learning experience will help prevent him from allowing that to happen again and he

owns >26% of the equity.

show sort by

			2015	2016
Price:	5.00	EPS	0.33	0.40
Shares Out. (in M):	40	P/E	15	12.5
Market Cap (in $M):	200	P/FCF	0	0
Net Debt (in $M):	94	EBIT	0	0
TEV (in $M):	294	TEV/EBIT	8.8	0