Bargain Alert (SAMPLE): Cheap Singaporean Logistics Provider Primed for Acquisitions
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This company’s entire market cap trades at less than its net cash, and you’re getting a resilient, highly profitable business with attractive returns on capital for free.
Legion Consortium (2129.HK) is a busted IPO that went public in 2021, only to see their stock price crater roughly -75% since then. This is an overreaction, and provides an intriguing opportunity for the enterprising investor.
The company is a family-owned Singaporean logistics provider that offers trucking services, freight forwarding, and open-yard storage and warehousing services. With a 0.5% market share in Singapore, the company was hardly on the radar of many investors, which was reflected in the pricing of their IPO at the lower limit of their offer price range ($0.4/ share, or ~20x 2020 earnings).
In actuality, they were probably lucky to have been able to pull of a listing. Had they been half a year late, they would have been met with a chilled capital raising environment globally, and certainly in Hong Kong. And despite pricing at the low end of their offer range, the valuation was quite decent for a small logistics operator.
Fast forward today, and the company is sitting on roughly HK$160M* of net cash, versus a market cap of ~HK$125M. Clearly, they are very cheap.
The company has no problems generating profits, earning about HK$22M in 2022, and HK$160M cumulatively since 2017. Although net margins have declined from 14% in 2017 to 7% in 2022, that’s still a very healthy margin for a small logistics operator, especially since they were impacted from a very tight labor market and elevated energy prices. Return on invested capital is phenomenal, at roughly 14% ROA (was as high as 43% in 2019).
Of their 3 operating segments, value added transport services (open-yard storage and warehouse services) has the highest pre-tax margins of 45%-55%. The fat margins here are likely due to a combination of strong demand for transport services, coupled with land scarcity in Singapore. Legion leases their logistics yards and warehouses, so if rental rates (typically short-term) were to move up sharply higher, margins could see some contraction if they’re unable to pass prices on to customers.
Trucking is their second highest operating segment, although it can be quite variable, ranging anywhere from 20% to 40% pre-tax. In extremely difficult/favorable environments, the margins could swing even more dramatically. Trucking in general is a tough business, but Singaporean trucking seems better than many other markets, again likely due to high demand generated from a very wealthy city, combined with constrained infrastructure capacity. In addition, since Singapore in very small, all trucking is basically last-mile delivery, which is the most impactful towards the customer experience. Here, expectations for timely (and intact) delivery is very high, combined with last-minute route changes, time constraints, and fuel usage consideration. As such, truckers servicing the last-mile must provide additional value-add in the form of elevated, flexible, and more efficient levels of service. When done right, this means higher profit margins for the company. Legion’s complete array of logistics solutions (including the warehousing and storage component) certainly adds to their competitive advantage vs just a pure-play trucking firm.
Their third segment, freight forwarding, enjoys the lowest, but most stable pretax margin of 25% - 30%. Freight forwarding is a very attractive, asset-light business, but it is also influenced by large economies of scale. Longer-term, it is uncertain whether Legion can maintain their position in this segment, as they compete with many deeper pocketed players with larger customer networks and comprehensive fleet capacity (air, ocean, rail, truck). In the meantime, however, they do seem to have built up a valuable portfolio of clients since their founding in 1995, who trust them with their logistic needs.
Which brings us to their large cash pile. This war chest positions the company very well for acquisitions, and perhaps especially so today as the global logistics and transportation market enters a downturn. As capital becomes increasingly tight, Legion will have the opportunity to further consolidate the industry and increase market share at more attractive valuations.
To this point, the company appears disciplined with acquisitions. Their recent 70% acquisition of Resolute Solutions adds LCL (less than container load) shipment services to their service offerings, creating a more defensible and sticky customer relationship. They paid ~$HK9.7M, or roughly 10x Resolute’s 2022 earnings on an unlevered basis (Resolute has net cash balance sheet).
As an aside, the chairman and CEO’s son is partially responsible (along with his father) for formulating the overall strategic direction of the group, which is another way of saying future acquisitions will likely cross his desk. Educated with a logistics management degree and having worked at Bolloré Logistics (logistics subsidiary of French billionaire Vincent Bolloré), combined with his father’s 38 years of experience in the logistics industry, chances are the company will continue to grow and add value in an attractive industry with long-term secular tailwinds. Since the family is the single largest shareholder with a 75% stake, they have every incentive to do so.
At less than net cash today, we are getting the remaining business for free, in a company that could grow and compound capital in a very wealthy, attractive market for decades to come.
*SGD to HKD exchange rate used: 5.40
(Disclosure: The author and funds under their management hold shares of Legion Consortium Ltd (2129.HK). We may hold, buy, and sell any securities mentioned on this blog at any time. The information contained herein should not be construed as investment advice or a recommendation to purchase or sell any specific security.)