Boom Logistics market update

Boom Logistics released a market update yesterday to give some insight in what to expect when the FY14 results are released next month. The company will post a big loss, but mainly because all goodwill has been written down to zero. What is more interesting is what we can learn about the companies asset value from the latest developments and impairment charges. Boom Logistics recognized an A$4.5 million impairment on assets held for sale. With $15 million in assets held for sale after this write-down this implies a 23% discount.

A 23% discount is great at current prices, but the asset value is likely even higher because Boom Logistics has a history of writing down assets for sale and consequently booking profits on sale. The second half of 2014 wasn’t an exception:

Quote from Boom Logistics trading update

Also note that part of my initial thesis here is confirmed, namely that the company would be able to sell its equipment internationally. A crane that can be used world wide will maintain Its value even when business sucks in Australia. A small impairment of fixed assets in Western Austrailia also confirms that the equipment value is still there:

Quote from Boom Logistics trading update

What’s also positive is that net debt has been reduced from A$102.0 to A$89.5 million the past six months. It’s not only good news though. The company spent $16 million in 2014 on new equipment which seems a bit excessive given the amount of idle equipment they presumably already have, and the fact that there have been no share repurchases is also a negative. Doubt if that’s an optimal allocation of capital…

Disclosure

Author is long Boom Logistics

15 thoughts on “Boom Logistics market update

  1. Martin

    Thx for the update. Site of boom logistics seems to be down, so I can’t check.
    Did they have obligation to purchase additional equipment or do you have an idea what is the rationale? Fuel efficiency for example is not as important as in shipping, right? Or did they already have a customer for the new equipment?

    More positives: executive pay freezes, cost cuts, new contracts

    Reply
    1. Alpha Vulture Post author

      I don’t think they had an obligation to purchase additional equipment, and fuel efficiency is certainly not the rationale. Probably equipment that has some capabilities that they didn’t have in the fleet. Hopefully stuff that they already had a customer for, but I don’t know…

      Reply
  2. Floris

    Pretty decent update. Hopefully the debt reduction came from asset sales and not a wind down of WC.

    I think the capex they did is for Travel Towers. Machines used for fixing overhead electricity lines etc. They stated they were investing in this type of equipment. Different end markets, mostly repair & maintenance. Not the most brilliant capital allocation given the share price, but alas, you’re also not paying top dollar for this business

    Floris

    Reply
    1. Alpha Vulture Post author

      They sold an additional $7 million in equipment while debt was reduced with $10 million or so. So could be a bit of WC release, or just some operating cash flow. They do make some money 🙂

      Reply
  3. 3pl

    What does that all mean in terms of future for Boom logistics. Is it still worth spending in them or there good time is over. The debts are getting short thats good news but still there is lot of work needs to be done to get the company to a stable position.

    Reply
  4. Investing Sidekick

    They also only sell their most specialised equipment which gets higher writedowns than the rest of the fleet. With the less specialised that is probably worth book value they just move it and utilise it somewhere else if need be.

    Reply
  5. pietje

    Interesting tidbits in the proxy:

    At the CEO & Managing Director’s own request, as of 1 July 2014, the fixed annual remuneration of the CEO & Managing Director was reduced by 10%.
     Restructure of the KMP roles in FY2015 and during FY2016 will result in an expected cost savings of circa. $1.1 million per annum from FY2016.
     There have been no short term incentive payments made to KMP in relation to FY2013 and FY2014. The short term incentive plan was suspended for all KMP in FY2015.
     All shares allocated to KMP under the Long Term Incentive Plan have not met their vesting conditions when they have reached their vesting dates.
     Remuneration of Non-executive Directors has remained unchanged since 2007.

    [..]

    For the share units to vest, the Company’s ROCE must be equal to or greater than 13% at the end of a three year performance period. That is, Senior Management only receive share units granted in 2015 at the end of three years (2018) if a target ROCE of 13% or greater is achieved. If this target is not achieved the share units are forfeited. By way of reference, the ROCE achieved by the Company in prior years was negative 2.0% (year ended 30 June 2015) and positive 3.8% (year ended 30 June 2014).

    The share units granted to Senior Management in 2012 will not meet the performance threshold and they will not vest.

    Looks like management incentives are at least somewhat aligned with ours.

    Reply
  6. pietje

    As per the CoBF discussion on Emeco, I think calculating the impairment discount this way is too simplistic. The assets held-for sale balance sheet item also changes because of asset sales and/or transfers from PP&E. Suppose they sold all assets held-for-sale during the year, would you conclude the writedown was 100%?

    Reply
  7. pietje

    Well, your math is: 4.5m writedown, 15m held for sale after writedown so discount is 4.5 / (15+4.5) = 23%. You used a similar calculation in the Emeco thread on CoBF.

    But what if they had sold the 15m inventory during the same accounting period (but after it was written down)? Assets held-for-sale would be zero in that case and the writedown would be 100% using this calculation.

    And what about the $17m asset sales during the period? Maybe these were transferred from PP&E, written down and subsequently sold. In that case the writedown would be much lower than 23%.

    So as far as I can see the calculated number is pretty much meaningless when you don’t take into account asset sales and transfers during the accounting period.

    Reply
    1. Alpha Vulture Post author

      I see your point, but based on this quote from the 2014AR it seems the 4.5M impairment is not over assets sold during the period, but only the impairment taken on the for sale assets that are still on the book:

      The balance in the Group’s assets classified as held for sale account at 30 June 2014 is $15.472 million. All assets classified as assets held for sale have been reviewed to ensure they are being carried at their recoverable amount less any selling costs. An impairment charge of $4.513 million has been recorded in profit and loss in respect of these assets (2013: $6.016 million), which are targeted for sale in FY2015.

      Reply
      1. pietje

        Sure, but could you know that at the time you wrote this post? I think you needed the additional info from the AR to deduce anything sensible.

        Granted, if they sell 17m assets at a profit, ending held-for-sale balance is 15m and the writedown is 4.5m things are probably ok.

        Reply
  8. pietje

    In other words, the writedown during a period is over assets transferred from PP&E during the period and/or over assets already held for sale at the beginning of the period. And these two do not add up to the ending balance because of asset sales during the period. So using the ending balance to calculate the discount doesn’t make sense afaik.

    Reply

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