COLD - Americold: Cold Storage Warehouse Market Growth And Undervalued

2023-12-12 11:17:19 ET

Summary

• Americold Realty Trust recently delivered lower-than-expected revenue, leading to a decrease in stock price.
• The implementation of a new ERP and the new Orion project provide room for optimism.
• Catalysts for future growth include the acquisition of Comfrio in Brazil, growth in the e-commerce industry, and the expected growth of the cold storage warehouse market.

Americold Realty Trust (COLD) recently delivered lower than expected revenue, which may explain some of the recent decreases in the stock price. However, given the recent acquisition of facilities, the new Orion project, and the implementation of a new ERP, in my view, there is significant room for optimism. I believe that the acquisition of Comfrio in Brazil, the growth coming from the e-commerce industry, and the growth expected for the cold storage warehouse market could be decent catalysts for the next decade. I do see risks from failed acquisitions, lower FFO than expected, or lower inventory levels accumulated by clients. With that, I do believe that COLD appears cheap.

Americold Realty Trust

Americold Realty Trust is the world's largest REIT focused on the ownership, operation, acquisition, and development of temperature-controlled warehouses. With a global network of 242 warehouses spanning approximately 1.4 billion cubic feet, the company serves customers in North America, Europe, Asia-Pacific, and South America.

Warehouses are an integral part of the cold chain, which is crucial for maintaining the quality of temperature-sensitive products and ensuring efficiency in the food supply chain. As owner of the majority of its warehouses, the company has greater control over the specialized nature of its assets and strategic placement to meet the needs of its customers. Its warehouse ownership gives it capital cost advantages and allows it to offer value-added services through a reliable and integrated network.

The company focuses on three main business segments: warehousing, transportation, and third-party management. In the warehousing segment, the company offers temperature-controlled warehouse storage services along with handling services and other related services. COLD has expanded this segment through strategic acquisitions and expansion projects.

In the transportation segment, the company provides consolidation, freight management, and dedicated transportation services to improve efficiency and reduce transportation costs.

Additionally, in the third-party managed segment, it manages warehouses on behalf of third parties and provides warehouse management services to food manufacturers and retailers. The company serves a broad customer base, including producers, distributors, and retailers of frozen and perishable foods, and focuses on providing a full suite of cold chain services.

With that about the business model, I think that having a look at the valuation of COLD makes sense right now. I believe that the recent earnings, which came a bit lower than expected, pushed the valuation of the company to undervalued levels. With this in mind, in this article, I ran a valuation model.

Balance Sheet: Significant Total Assets Growth

In the last quarter, I did not see a significant change in the total amount of assets, property, and goodwill. However, I do want to point out the increase in the total amount of assets and net property experienced in the last four years. In my view, if COLD continues to deliver asset increases, we could expect larger Price/FFO than that of peers.

In the last quarter, as of September 30, 2023, the company reported land close to $794 million, buildings and improvements worth $4390 million, machinery and equipment of about $1501 million, and net property, buildings, and equipment close to $5.033 billion.

Additionally, the company noted cash, cash equivalents of close to $53 million, goodwill of $1.022 billion, and total assets of $8.013 billion. The asset/liability ratio stands at close to 2x, so I believe that the balance sheet appears stable.

In the last six months, COLD reported lower debt. However, the decrease in leverage was not remarkable. The total amount of debt is not far from 0.5x-0.7x the total amount of properties, so I do not think that the total amount of leverage will look scary for investors. With that, I thought that studying the list of obligations was reasonable.

Senior unsecured notes and term loans were equal to $2.560 billion, with sale-leaseback financing obligations of about $164 million, financing lease obligations worth $70 million, and operating lease obligations close to $245 million. Finally, total liabilities were equal to $4.067 billion.

Financial Expectations Include Sales Growth In 2024 And 2025 As Well As Positive Net Income In 2024 And 2025

I believe that the numbers delivered by other investment analysts are quite beneficial, and readers may want to have a look at them. Note that net sales growth is expected to be close to 8%-9%, and net income is expected to be positive in 2024 and 2025. In particular, 2025 net sales are expected to be close to $3.222 billion, with operating margin of 9.4%, and 2025 net income of $134 million. It is a pity that I could not find information about other forecasts made about future FFO , which is used in the REIT industry.

Leveraging Outsourcing And Benefiting From The Growing E-commerce Industry Could Bring Significant Net Sales Growth

COLD is looking to leverage outsourcing in the temperature-controlled storage industry as well as to benefit from growing e-commerce industry. With experts like Transparency Market Research expecting global growth of close to 12% CAGR, most analysts are expecting the e-commerce sector to be the main catalyst for the industry. Taking all these factors into consideration, I believe that COLD is well positioned to enjoy business growth in the next decade.

E-commerce sector growth is expected to drive market development in the near future. Source: Cold Storage Warehouse Market

The global Cold Storage Warehouse Market was valued at US$ 119.7 Bn in 2022 and is anticipated to reach US$ 331.5 Bn by 2031, expanding at a CAGR of 12% between 2023 and 2031. Source: Cold Storage Warehouse Market

The Acquisition Of Comfrio In Brazil Was Recently Approved By The Government

In 2023, the government of Brazil approved the acquisition of Comfrio Joint Venture, meaning that we will likely see, in the future, the acquired business model included in COLD's balance sheet.

With regards to the purchase of Comfrio Joint Venture in April 2023, the two parties received regulatory approval from the Brazilian government, and the acquisition closed on May 30, 2023 (the "Acquisition Date"). Total consideration paid was $56.6 million, of which $46.7 million was funded during the nine months ended September 30, 2023. Prior to the Acquisition Date, the Company's 22% equity interest was accounted for as an equity method investment. Source: 10-Q

Even if the acquisition does not sound large, I believe that it is great news. It means that COLD is ready to enter markets that grow at a larger pace than that in North America. According to experts in market assessment, the Brazil cold chain logistics market is expected to grow at a double digit from 2023 to 2028.

The Brazil Cold Chain Logistics Market size is expected to grow from USD 2.43 billion in 2023 to USD 3.92 billion by 2028, at a CAGR of 10.02% during the forecast period (2023-2028). Source: Brazil's Cold Chain Logistics Industry Flourishes

Diversification Will Most Likely Bring Lower FFO Volatility Than That Of Peers, Which May Bring The Interest Of More Investors

Among all the slides I have seen in recent presentations, in my view, the most relevant is shown below. It shows that COLD is working with many different products in various geographic locations. As a result, I believe that COLD will most likely exhibit significantly less FFO volatility than other peers working in more niche markets or with a limited number of products.

The Project Orion, Which May Last Around Three Years, Could Bring Significant FFO Growth

In 2023, the company noted the new Orion project, which includes the implementation of a new ERP and a significant number of new initiatives to integrate the number of facilities recently acquired. The project is expected to run for the next three years, so I would be expecting an improvement in the FFO margin in 2024, 2025, and 2026.

In February 2023, we announced our transformation program "Project Orion". The primary goals of this project are to streamline standard processes, reduce manual work and incrementally improve our business analytics capabilities. Highlights of the project include implementing centralized customer billing operations, a global payroll and human capital management platform, next-generation plant maintenance capabilities, global procurement functionality and shared-service operations in certain international regions, among others. Source: 10-Q

My FFO Expectations Based On My Previous Assumptions And Previous Financial Figures

My expectations include 2032 rent, storage, and warehouse services of about $5.802 billion, 2032 transportation services of close to $1.027 billion, and third-party managed services worth $294 million. 2032 Total revenues would be close to $7.124 billion. The median revenue growth from 2023 to 2032 would be close to 8.3%, which I believe is close to previous figures.

I also expect growing operating expenses from 2023 to 2032 and a small growth of operating margin. From operating margin of close to 1.6% in 2023, 2032 operating margin would be close to 2.4%. I also expect an increase in the FFO/net sales as I believe that economies of scale could bring certain margin increases.

In particular, I assumed 2032 rent, storage, and warehouse services cost of operations of close to $4600 million, with transportation services cost of operations of about $830 million, and third-party managed services cost of operations of $284 million. Besides, with depreciation and amortization of about $831 million, selling, general, and administrative worth $343 million, and loss from sale of real estate of $58 million, 2032 operating income would be $171 million.

With 2032 expected interest expense of close to -$248 million, interest income worth $4 million, and net income of $153 million, I obtained FFO of close to $1.048 billion.

Exit Multiples, WACC, And My Valuation Estimates

According to SA, P/FFO in the sector stands at close to 12x FFO, however COLD is trading at close to 28x FFO. With this in mind, I assumed a valuation between 12x and 15x.

For the calculation of the WACC, I took a look at the debt reported by COLD. The debt bears interest at variable rates based on different reference rates such as SOFR, CDOR, SONIA, BBSW, EURIBOR, and one-month BKBM in accordance with the relevant agreements governing the debt, including its global revolving credit facilities. As of December 31, 2022, the weighted average term of the debt was approximately 5.7 years. The contractual interest rate is close to 1.6%-4.6%, so I assumed a WACC of about 4.6%-9.6%, which in my view appears sufficiently conservative.

With a WACC of 4.6%-9.6% and Price/FFO of 12-15, the implied valuation would be between $9.7 billion and $15 billion. The median valuation without debt is close to $11-$12 billion.

If we divide by the share count, the median forecast price would be $41-$46 per share with a maximum price of $55 per share. The maximum internal rate or return would be 9.5%, but the median IRR stands at close to 4.6%-6.06%.

Risks And Competition

In my opinion, the company is exposed to the risk of economic downturns in this industry more significantly than if it was diversified into other sectors of the real estate market.

It is also exposed to fluctuations in the markets and the production of the products it stores in its warehouses. For example, the demand and production of poultry products directly affect the need for temperature-controlled storage space for the customers. If production or demand for these products decreases, customers could reduce their inventory levels in warehouses, which could have a material and adverse impact on storage rates and the overall business.

In the warehousing industry, the main competitive factors include the strategic location of warehouses, the size and availability of storage space, the extent and connectivity of warehouse networks, the quality of customer service, the type of service offered, and competitive prices.

Transportation costs are a major factor for refrigerated food customers, making location and transportation capabilities key elements in competition. Warehouse size is relevant as large customers prefer to have all products at a single location and the flexibility to expand storage during periods of high demand. In areas with local competition, customers evaluate the service level, price, and quality of the store when selecting one.

The existence of private warehouses also competes with the public warehousing industry, and the ability to offer high-quality integrated logistics management services becomes increasingly relevant. Companies also compete for customers who may choose to have their own internal storage.

My Opinion

In my view, COLD's extensive network of warehouses and its ownership of the majority of them give it a competitive advantage in terms of strategic location and control over its specialized assets. Additionally, its focus on the warehousing, transportation, and third-party management segments allows it to offer a complete set of cold chain services. I believe that diversification will most likely help bring lower FFO volatility than peers. Moreover, considering the Orion project, the new ERP being implemented, and recent acquisitions outside the United States, like the Comfrio Joint Venture, will most likely bring FFO growth. I do see risks from lower FFO than expected, failed acquisitions, and customers using their own storage. Having said so, I believe that COLD appears undervalued.

For further details see: