RLGT - Radiant Logistics: Many Risks Lower Ocean Rates But Undervalued

2023-07-06 15:26:09 ET

Summary

• Radiant Logistics recently reported a decrease in international and ocean rates, as well as lower ocean volumes, resulting in lower quarterly revenue. However, this decrease is expected to be temporary.
• The company's growth strategy includes further sales growth driven by the increasing number of commercial and digital stores, further hiring, and inorganic growth through acquisitions.
• Despite potential risks from failed M&A integration or unsuccessful international expansion, Radiant Logistics is predicted to trade at higher stock price marks in the future.

Radiant Logistics, Inc. ( RLGT ) recently reported an impressive decrease in international and ocean rates as well as lower ocean volumes, which lowered quarterly revenue. In my view, the decrease in volume is transitory. Under my DCF model, I assumed further sales growth driven by the growing number of commercial and digital stores, further hiring, and inorganic growth. Even taking into account risks from failed M&A integration or failed international expansion, I think that RLGT could trade at higher stock price marks.

Radiant Logistics

With activities mainly in the United States and Canada, Radiant Logistics is a provider of logistics services for businesses, with an integrated technology infrastructure that allows it to develop services with great added value.

Through a multi-brand platform and network that includes more than 100 points of operations, the company also has an international reach in some of the world's key markets. Radiant Logistics' transportation network includes ocean, air, rail, and truck shipments, and in most cases, the assets are not owned by it, unlike a large number of players in this industry, allowing flexibility while offering its services and generating confidence in the quality and delivery thereof for its clients .

Operations are divided into two segments: the United States and Canada. The distinction in this sense is purely geographical. Roughly speaking, for both segments, operations can be divided into cargo transportation and transportation brokerage.

The first of these categories includes the process of obtaining materials, the creation of maritime or airlines for transport, and the arrangement and remote monitoring of shipments through technological systems.

The second segment, the transport brokerage, is mainly aimed at clients who need to transport loads in the field of food, with refrigeration or special conditions. This segment is focused on truck transportation, whether half load or full load, and works mostly on internal transportation within the United States, through routes pre-agreed with its customers, unlike the cargo transportation category, where it is the company that decides according to means, load capacity, product, and destination which are the routes to transit. Among the company's operations, we find related services such as distribution and management of materials, management services for customs procedures, and management of global transactions to obtain materials or related procedures

Among the features of Radiant Logistics that I would remark on, there are some of the members of the management. Most of them worked for large competitors in the logistics industry like Arnie Goldstein, SVP and CCO, or Bohn Crain, the founder and CEO.

With know-how accumulated in the industry and connections with other organizations, I believe that Radiant Logistics will most likely offer services and products better or with the same quality standards seen in the logistics markets.

Balance Sheet

In the last quarterly report, Radiant Logistics reported less assets as compared to the figures reported in June 2022. The decrease in assets was driven by a significant decrease in the total amount of accounts receivable. With that, I am optimistic about the new financials because the total amount of cash increased significantly, and the total amount of notes payable is worth a bit more in 2023 than that in 2022. With less debt and more cash, I would be expecting new acquisitions in the coming years. See below that the financial debt/equity ratio decreased significantly, which most investors would most likely appreciate.

More in particular, Radiant Logistics reported cash and cash equivalents of about $51 million, with accounts receivable close to $118 million, contract assets of about $33 million, and prepaid expenses and other current assets worth $13 million. Total current assets are equal to $216 million, above the total amount of current liabilities. I am not concerned about the liquidity reported by Radiant.

Non-current liabilities include property, technology, and equipment worth $25 million, goodwill of about $89 million, intangible assets close to $39 million, and operating lease right-of-use assets worth $58 million. Finally, with total assets of $433 million, the asset/liability ratio stands at close to 2x .

The list of liabilities does not seem worrying because of the recent reduction in notes payables and accounts payable. Accounts payable stand at close to $94 million, with operating partner commissions payable worth $16 million, accrued expenses of about $7 million, and current portion of notes payable of $4 million. The company also reported notes payable of about $28 million, with operating lease liabilities close to $53 million and total liabilities of about $227 million.

Beneficial Market Expectations

I could not find a lot of information about the expectations of Radiant Logistics for the year 2024. With this in mind, in my opinion, having a look at the expectations of other financial analysts is quite interesting .

Expectations of investors appear beneficial. Market estimates include 2024 net sales of $1.135 billion, 2024 EBITDA of $56.4 million, 2024 EBIT close to $33.7 million, and net income close to $19.6 million. Also, with 2024 free cash flow of $20.9 million, the FCF/sales ratio would stand at 1.84%.

My DCF Model Implied A Valuation Of $13 Per Share

If we talk about Radiant's strategy, since 2006, the company has been carrying out a strategy of growth and expansion into new markets. From 2006 to the present, it has achieved the acquisition of 21 companies or businesses in the field of logistics and technology. With this in mind, this growth is projected to be organic growth through the expansion and deepening of its clients and the achievement of commercial agreements with partners at a global level. In the last quarterly report, management noted that acquisitions would most likely continue.

In addition to its focus on organic growth, the Company will continue to search for acquisition candidates that bring critical mass from a geographic and purchasing power standpoint, along with providing complementary service offerings to the current platform. Source: 10-Q

Taking into account the extensive expertise of Radiant Logistics in the M&A markets, and previous successful integration of acquisitions, I would expect new acquisitions in the future. New acquisitions would bring new service offering expansion, operational synergies, and customer base growth, which will most likely accelerate the FCF growth.

Under my financial model, I assumed that Radiant would successfully make meaningful investments in the salesforce platform, which would most likely drive organic growth up. Besides, further vertical specialization and hiring experts from the industries that the company serves will continue to bring valuable know-how, which may enhance efficiency. Additionally, taking into account the current level of cash, I would be expecting an acceleration of new agent onboarding thanks to the multi-brand strategy implemented by Radiant. As a result of these initiatives, I think that Radiant would experience FCF growth.

Let us remember that a particularity of the company is that it contracts the services of third parties, being a company dedicated to logistics management and not to its execution. This generates a differential over most of the industry participants, who focus their activities on keeping their transport fleets full and active to avoid operating costs. Radiant, on the other hand, can focus on the specific needs and times of each client. As stated in its annual report, the demand for this type of service is growing year after year due to the globalization of trade, the expansion of trade routes, and the growing number of commercial and digital stores. I assumed that the special offer given to clients and the new changes in the industry will most likely bring FCF growth in the coming years.

In the last quarterly report, Radiant noted a significant decrease in significantly lower ocean volumes and international and ocean rates. Under my DCF model, I assumed that some of these decreases in rates would most likely be transitory. I believe that volumes would most likely increase in 2024 and 2025.

Transportation revenue was $229.3 million and $429.2 million for the three months ended March 31, 2023 and 2022, respectively. The decrease of $199.9 million, or 46.6% is primarily attributable to a significant decrease in international and ocean rates, including significantly lower ocean volumes, and a lack of non-recurring charter business which occurred in the year ago period. Source: 10-Q

Finally, in my DCF model, I also assumed that the stock repurchase program, which authorizes to acquire up to 5 million shares in 2023, would most likely bring demand for the stock. As a result, we may see a gradual decrease in the WACC, which may have a beneficial impact on the stock price valuation.

I did not really think a lot out of the box for assessing future net income growth and FCF generation for the next ten years. I tried to be as conservative as possible, so net income growth from 2024 to 2029 was assumed to be close to 6.8%. The logistics market is expected to grow at close to 6.8% CAGR, so I believe that my figure appears conservative. I also assumed CFO and FCF growth because efficiency and M&A integration would most likely improve the cash flow statement of Radiant Logistics.

This is a compound yearly growth rate of 6.80%. The primary market drivers accelerating market expansion are the expanding e-commerce sector and the rising demand for logistics operations. Source: Logistics Market to Expand at a CAGR of 6.80%

My financial model includes 2033 net income of close to -$2 million, 2033 share-based compensation of about $9 million, amortization of intangible assets worth $25 million, depreciation and amortization of property of close to $16 million, and accounts receivable of close to $128 million.

Also, with contract assets of $138 million, changes in income tax receivable of -$51 million, prepaid expenses, deposits, and other assets close to -$18 million, and changes in accounts payable of -$122 million, I also assumed changes in operating partner commissions payable of -$22 million.

Finally, with accrued expenses and other liabilities worth $9 million and operating lease liability of -$23 million, the CFO would be close to $89 million. If we subtract 2033 capital expenditures of -$15 million, 2033 FCF would be close to $73 million.

With a WACC of 8.9% and an EV/FCF of 9x, the implied total valuation would be close to 9x. Note that the transportation sector shows an EV/EBITDA of close to 12x, and the company pays interest of close to 6.65% per annum. With these figures in mind, I believe that both the WACC used and the EV/FCF appear conservative.

Borrowings under the Revolving Credit Facility accrue interest (at the Company's option), at the Lenders' base rate plus 1.00% or LIBOR plus 2.00% and can be subsequently adjusted based on the Company's consolidated leverage ratio under the facility at the Lenders' base rate plus 1.00% to 1.75% or LIBOR plus 2.00% to 2.75%. As of June 30, 2022 and 2021, the interest rates used were 3.50% and 2.10%, respectively. Source: 10-K

The Company and its U.S. and Canadian subsidiaries are guarantors of the Radiant Canada obligations thereunder. The loan matures on April 1, 2024 and accrues interest at a rate of 6.65% per annum. Source: 10-K

If we also include cash and cash equivalents of $51 million, the current portion of notes payable close to $4 million, and notes payable of $28 million, the equity valuation would stand at $622 million. Finally, the fair price would be $13.38 per share, and the IRR would stand at close to 4.99%.

Risks From Competitors

The logistics business depends directly on the exchange capacity and the activities in this regard, both domestically and internationally, which in turn depend on global economic conditions. Competition in this framework is highly fragmented. Radiant competes with asset-owned and non-asset-owned logistics companies, transportation companies, industry consultants, and in some cases the logistics capacity of its own customers or their supplier companies. In my view, it is quite relevant noting that competition could harm the financials of Radiant quite a bit. Competition could lead to reduced profit margins, which would most likely affect the total stock valuation.

The freight forwarding, freight brokerage, logistics and supply chain management industry is intensely competitive and is expected to remain so for the foreseeable future. We face competition from a number of companies, including many that have significantly greater financial, technical and marketing resources. Customers increasingly are turning to competitive bidding processes, in which they solicit bids from a number of competitors, including competitors that are larger than us. Increased competition may lead to revenue reductions, reduced profit margins, or a loss of market share, any one of which could harm our business. Source: 10-K

Risks

Material inconsistency in the preparation of its quarterly reports or annual reports could lead to complications for future credibility. In this regard, in the last annual report, Radiant Logistics included material weaknesses in internal control over financial reporting in 2022.

As further described in Part II Item 9A "Controls and Procedures" of this Annual Report, management has concluded that our disclosure controls and procedures were not effective as of June 30, 2022 because of material weaknesses in internal control over financial reporting related to: our controls with respect to the recording and processing of revenue as currently designed lack the level of precision necessary to ensure the completeness and accuracy of revenue. We are currently working on the remediation of this material weaknesses. Source: 10-K

On the other hand, the future ability to integrate technological processes into the business infrastructure is crucial like the ability to maintain and reduce operating costs because of the company's greatest differential and competitive strength within the market in which it participates. In addition, Radiant's activities are maintained with large immediate payments for third-party operations, and the inability to comply with either of these two requirements can eventually lead to serious complications for the company.

In addition, we can name other important factors such as the market share that the company manages to occupy in the short term in an industry that is beginning to consolidate as well as the possible inability to manage growth and the emerging risks due to exposure to global economic conditions in its expansion strategy towards international markets. Many of these initiatives could fail, which would lead to lower FCF margins or even net income losses.

Finally, I would add failed M&A operations or lack of suitable M&A candidates as one of the most relevant risks for Radiant Logistics. If the company fails to assess the valuation of targets, or fails to execute the post-merger integration, goodwill impairments could lower future FCF expectations.

Conclusion

Radiant Logistics recently reported a decrease in international and ocean rates, including significantly lower ocean volumes, which pushed transportation revenue down. In my view, these decreases would most likely be transitory. I believe that volumes and transportation rates will most likely go up in 2024 and 2025. Considering the expertise in the M&A markets and the intentions noted in the last quarterly report, Radiant will most likely experience inorganic growth in the future. I also believe that further hiring and the growing number of commercial and digital stores will serve as revenue catalysts in the next decade. Even taking into account risks from failed M&A integration or failed international expansion, I believe that the company could trade at higher price marks.

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