Stalled in the slow lane: What next for logistics companies?
Sector accurately reflects the gridlocked SA economy
If there is a JSE share sector that illustrates the euphoria of the first part of 2018 and the depression that followed, it’s logistics.
Barloworld, Imperial and Super Group all surged in the first few months of the year, but have subsided again. Over a three-year span logistics groups threatened to outperform but have now have deflated, more or less rejoining the JSE’s overall flat trajectory.
The drama of this reversal has been enormous: Barloworld was at one point 110% up over three years and is still up over 50% on that measure. Super Group is flat and Imperial is up 24%.
The reason for this reversal is obvious: logistics companies are tightly bound to the economy. As intermediaries between buyers and sellers of all types in all sections of the economy, they are great bellwethers. It is worrying therefore that they seem to have lost much of their lustre.This is somewhat mitigated by the efforts of logistics companies to hedge their investments, mostly by expanding offshore. Imperial, for example, earns roughly the same from its international logistics business as it does in SA.
Having said that, the results of logistics companies are holding up pretty well. Their forward price to earnings ratios are not particularly demanding, but then neither are they for the market as a whole.
Imperial releases results at the end of the month, but it has already indicated that earnings per share will increase between 34% and 41% (excluding its troublesome insurance unit Regent which it is hoping to jettison). The only problem is that the reasons for the big increase are somewhat technical. The earnings come off a low base, its foreign exchange losses will be coming down, and its financing costs have been reduced. That explanation reduces the excitement somewhat. Still, in the current environment, flat is not the worst possible outcome.Perhaps the most interesting of the logistics groups is Super Group, which rebounded from the very brink of bankruptcy in wake of the 2008 economic crisis to be about a third the size of Imperial and half the size of Barloworld today.
The share has been lacklustre for the past year or so but that doesn’t diminish the extraordinary journey the company has been on over the past decade. I remember a conversation I had with CEO Peter Mountford some time ago when he told me that the day after he was appointed he had to go into a series of meetings with bankers. In one case, he was given 15 minutes to argue why the group should not be wound up, there and then. He told me ultimately the banks were supportive, but it was the normally hard-bargaining Investec that really saved the group and came to its rescue. Bankers, it turns out, can be understanding.
Mountford managed to reestablish the group with great patience and fortitude. He also managed to pull off the thing that has so eluded SA’s business: making a success of mergers and acquisitions. Super Group bought 75% of German logistics company In Time for €137.2m in 2015, and it has a great boon for the company.
The interesting thing about logistics groups is Imperial’s decision to split its logistics business proper from its motoring business. Will the others follow suit?
The model of a joint business is more prevalent in SA than elsewhere, I suspect. The question is this: Is there sufficient overlap between the “moving things from one place to another” business and the car and truck business?
In theory, if you are in the “moving things with trucks” business you might as well be in the truck buying and selling business too. But how does a logistics business mesh with the buying and selling of ordinary cars?
Not very well I suspect. For one thing, the capital intensity would probably be different. Certainly, the customer is different. In the one market you are working essentially for wholesalers and in the other you are deep into retail.
Following Imperial’s decision to split, I suspect the other groups will be facing some questions on the topic.