Boom Logistics: Emeco’s cheaper cousin

After my unsuccessful dabble in Emeco a reader pointed me in the direction of Boom Logistics: a company that is in many ways almost identical. Boom Logistics is also an Australian rental company with a big exposure to the mining industry and a heavy debt load. The type of equipment is different though: Boom Logistics owns and operates more than 400 cranes and over 250 travel towers. Before diving deeper in the company some quick metrics:

Last price (Jun 13, 2014): 0.135 AUD
Shares outstanding: 474,868,764
Market cap: 64.1M AUD (60.3M USD)
EV (mrq): 166.0M AUD
Tangible P/B (mrq): 0.26x

What we see here is that Boom Logistics is trading at a significant discount to book value. So if book value even remotely resemblances economic value the upside could be huge. At the same time there is a significant amount of debt, but it’s a lot less than what Emeco needs to cope with. The deb/equity ratio of Boom Logistics is 1.59x versus 2.88x for Emeco. The lower leverage provides a bigger margin of safety, and a lack of one was exactly why I sold Emeco.

Boom Logistics equipment

Asset valuation

Cranes are assets that are not purely used in the mining sector making the value of the assets less dependent on the state of the Australian resource sector (and by proxy the Chinese economy). The mining sector itself is pretty important for the operational results of Boom Logistics since it accounted for 68% of revenue if FY2013.

We have a couple of data points that can be used to guesstimate how much the equipment is worth. Last year the company recorded a A$11.0 million impairment and A$6.0 million of this amount was attributable to “assets classified as held for sale”. With A$10.9 million in assets classified as held for sale at the end of FY2013 this implies that the assets were written down by 35.6%. While Boom Logistics would still be significantly undervalued if we would apply this discount to the whole fleet there are a couple of reasons to believe that this discount is overly pessimistic:

  • In the subsequent first half of FY2014 Boom generated A$9.9 million from the sale of equipment and recorded a net profit on disposals of A$2.5 million. If we assume that this profit is representative for the value of all the assets held for sale at the end of FY2013 the true discount to unimpaired book value is just 14.4%.
  • Boom Logistics sold equipment that wasn’t a good fit with the rest of their fleet and that should be expected to have less value in the used equipment market because they sold “the less recognised brands, one-off, specialised, prototype or unusual model cranes”.

The latest interim report contains some other hints that the intrinsic value of Boom Logistics’ assets doesn’t diverge hugely from book value. Being able to sell assets at a premium to book value is very encouraging, although it’s obviously a small sale:

During January, the Group sold its Tasmanian access & general hire assets to local Management for proceeds of $1.55 million and a profit on sale was realised which will be recognised in second half accounts.

The refinancing of the debt in December is another positive:

In December, the Group successfully completed the refinancing of the company’s syndicated bank debt facility, which was due to mature in August 2014.

The A$120 million 3 year revolving debt facility has been provided by existing syndicate members National Australia Bank and GE Capital and introduces ANZ Bank as a new syndicate member.

The rigorous due diligence performed as part of this refinancing has given the Group further significant comfort in respect of the carrying value of its assets.

What’s probably the best sign is that the new debt facility carries the same 7.5% interest rate as the old debt while covenants have been loosened. Note that interest rates in Australia are higher than in the US and the EU by approximately 2.5% so this is a pretty reasonable rate and a lot better than the ~10% rate that Emeco is now paying.

Pinpointing how much the assets of Boom Logistics are exactly worth is hard, but you don’t need to be very precise at the current market price. If we assume that their other assets and liabilities are simply worth book value we get the following graph:

Upside Boom Logistics depending on discount on equipment

The market seems to be thinking that Boom Logistics equipment is worth a bit less than half its book value while I’m thinking that a 35% discount is already pretty pessimistic.

As a sanity check we can also look at how Manitowoc (NYSE:MTW) and Terex (NYSE:TEX) are doing. See for example the slide below from the latest Terex presentation:

Terex Cranes segment sales and bookings

And at Manitowoc the situation seems to be similar:

Crane segment backlog totaled $842 million as of March 31, 2014, an increase of $267 million, or 47 percent, from the fourth quarter 2013. First-quarter 2014 orders of $733 million were 29 percent higher than the first quarter of 2013, representing a book-to-bill of 1.6 times. Orders in the quarter include all confirmed orders that were placed at the ConExpo trade show, of which approximately 26 percent of the backlog will be delivered in 2015 or later.

The lower demand that Boom Logistics is facing seems to be a local issue. In Manitowoc’s 2013 annual report we can find the following table with a geographic breakdown of revenue:

Manitowoc sales by region

As is visible their revenue in Australia was down by a significant amount, but they are doing fine in the rest of the world. This is also a point were Boom Logistics differs positively from Emeco. The various mining equipment manufacturers are seeing a strong worldwide drop in demand and as a result the prices of second hand equipment are also dropping world wide. Boom Logistics should have a lot less trouble to sell their equipment globally for a good price, and their results so far seem to indicate that this is indeed the case.

Insiders

A weak point in the thesis – one that Emeco also shared – is that insiders own very little of the company: just 1.0%. But it doesn’t appear that corporate governance is a problem at this point in time. The company put for example a freeze on senior executive salaries during FY14 which is appropriate given the current results and the fact that they are also shrinking the work force. Seeing management shrink a company is in my opinion always a good sign from the governance perspective.

Management is also thinking about shrinking the company through share repurchases. This could generate a lot of value if the company is in fact undervalued, and it appears that management seems to think this is the case:

Following last year’s level of capital investment we expect a significantly lower requirement for new investment in FY14 and free cashflow will be directed to further debt reduction and an expected on-market share buyback. The latter is a response to the continuing gap between our share price and the underlying net asset backing per share of 51 cents.

You have to question though how strong their believe is when you don’t see insider buys…

Conclusion

Until now I haven’t talked about earnings and cash flow, but that is because the company produced and is producing plenty of both. It’s currently trading at a P/E of just 7.5x when we annualize the results of the first half of FY2014 and exclude one-time gains and losses. If utilization improves the company could earn a massive amount compared to its current market cap, and when things don’t turn around they can sell idle equipment.

I don’t hope that they need to liquidate a big part of their fleet, but I think that at current prices they could do that and as a shareholder you would still be able to generate a healthy profit. The asset value is there to provide a margin of safety. Buying something cheap that could produce great returns when things turn around is easy. Buying something cheap that can also produce great returns when things don’t turn around is a lot harder, but I do think I have found that combination in Boom Logistics.

Disclosure

Author is long Boom Logistics

23 thoughts on “Boom Logistics: Emeco’s cheaper cousin

  1. Nate Tobik

    I recently talked to a fund manager who visited the company. They talked extensively about the asset value. The bank extending the loan looked at the value of each crane and determined on their own that Boom was worth BV. This is reassuring.

    The market is pessimistic, but many investors don’t want to touch Australia in general.

    Shoot me an email if you want more info.

    Nate

    Reply
    1. Magnus Berchtold

      Hi Nate,

      Interesting comment – can you say more about the fund manager you have talked to (who visited Boom Logistics)? Would be interested in contacting him / learning more about their meeting.

      Thx, m

      Reply
  2. pietje

    Interesting idea, will put some time in it. With regards to your nice graph: assuming you left out goodwill?

    Reply
  3. Pol

    Had a look at Boom too, but found the debt load quite sizeable compared to cashflow generation, so didn’t find it that cheap.

    I have taken a position in MacMahon Holdings. Not really a great company, but has the same discount to tangible book as Emeco, has very little debt and has pretty much revenue certainty for 3 years into the future.
    Maybe worth checking it out.

    Looks like Australia is one of the very few western countries left where you can still find bargains, even outside mining services.

    Reply
    1. Alpha Vulture Post author

      Think Boom generated 13.4 million in cash flow in the past half year versus 102M in net hebt. That sounds alright to me and they can always increase their cash flow by selling more idle equipment.

      I’ll take a look at MacHahon Holdings. Agree with you that Australia seems to be a good place to hunt for bargains.

      Reply
      1. Joske

        Just saying, the 13.4M number already INCLUDED equipment sales. The ‘pure’ free cash flow for this year (excluding equipment sales) will be roughly $12-14M. Including equipment sales this should be around $30M.

        Just a remark, as I agree the company should be able to repay its debt without any issues. It’s all about spending the money wisely. Additionally, as the debt will be paid down year after year, Boom’s interest bill should decrease yearly, which will increase the FCF.

        Reply
  4. JB

    You wrote “The various mining equipment manufacturers are seeing a strong worldwide drop in demand and as a result the prices of second hand equipment are also dropping world wide. Boom Logistics should have a lot less trouble to sell their equipment globally for a good price, and their results so far seem to indicate that this is indeed the case.” So how will Boom easily sell its equipment for a good price? It seems like the second sentence contradicts the first.

    Reply
    1. Alpha Vulture Post author

      I probably could have formulated that a bit better, but I don’t consider cranes to be mining equipment per se. They use the cranes in Australia mostly for mining simply because that is a big part of their economy, but in the rest of the world there are a lot of other uses for cranes. That’s why Boom Logistics could sell the cranes in other countries for a good price.

      Reply
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  7. JJ

    What about dilution, is that a risk? They diluted in 2006 and 2010. 150 million and 50 million each i think. Also it seems this is heavily dependant on construction, any idea where that cycle is? I had the impression Emeco is more operating (and has a nice exposure to canadian oil sands).

    Reply
    1. Alpha Vulture Post author

      I’m not worried about dilution at this point. The company is shrinking, reducing debt, reducing head count, selling equipment and thinking about buying back shares. Issuing shares for an acquisition to grow the company wouldn’t make any sense.

      And from the latest AR, emphasis mine:

      Boom’s revenue is derived primarily from major customer maintenance contracts. Boom is consequently less reliant on construction expansion projects and is not exposed to exploration or new mine development. In addition, Boom has a strong capability to support customers who need to maintain production levels of existing facilities.

      Reply
  8. jjaap

    Hey, I studied this one some more, and it seems that margins have been under pressure due to increased competition in the past 5-6 years. Decreasing from 30% to 16% recently (revenue – cash charges excluding depreciation etc) It also seems that they do have exposure to mining by reading the annual report. They are more diversified, but that also means they don’t have the market as locked down as Emeco has. They also lost a very profitable contract in 2013, and if competition heats up, combined with a serious mining down turn (not just construction), this one could result in some firesales. Because despite shrinking (EHL acutally grew) they had very weak FCF and had to issue shares to keep debt under control in 2010. So I am not sure if the profitable days of 2006 will return. They don’t seem to have any market locked up like EHL has.

    It seems Emeco is reasonably protected against this with very large market share in Australia and some nice opportunnities in Canada. And their Ebitda margins are several times higher as well.

    Anyway still probably not a bad pick, things need to go really wrong to lose on this one. gl with it.

    Reply
    1. Alpha Vulture Post author

      I don’t think Emeco’s market position is noticeable better Boom’s. Both have a business model with a high threat of substitution because there is always an alternative for renting equipment. Creating economics of scale by having the biggest rental operation in your geography only creates a limited moat.

      And yes, I doubt that the days of 2006 will return. But that’s absolutely not what I’m betting on.

      Reply
  9. jjaap

    ebitda and ebit margins are 2-3x higher for Emeco, so Emeco seems to have higher ROA and bigger scale advantage. Even on a smaller scale in Canada.

    I like this though:

    Boom Logistics Employee Share Plans 13,439,096 2.9

    This means employees own 13 million shares right? Or is this options outstanding or something.

    I cannot see that in Emeco, allthough several Emeco directors did buy several 100k$ worth of stock recently. And there is more upside with that one in oil sands where they are already the largest player. And looking at Chile, demand isn’t about to slow down t here long term (while in Indonesia the signals were clear). Choices choices 😀 , now I don’t know which one to pick.

    Reply
    1. Alpha Vulture Post author

      I think the 5.1% mentioned there is the floating rate, but they have hedged this and are paying a higher fixed rate. If you check how much cash interest they paid and how much debt they have you find that the average interest rate in 2013 was around 8% (simply by looking at the balance sheet and cash flow statements). In addition to this you also have this announced from the company when they refinanced:

      Boom’s overall cost of debt is expected to remain at an average of circa 7.5%, consistent with the previous facility.

      Reply
  10. Jayi

    Hi, any updates on Boom? The NAV declined slightly YoY but the price per share still implies a hefty haircut to the ultimate recovery value…

    Reply

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