RLGT - Radiant Logistics Weathered The Storm Well In Q1 FY24

2023-11-28 22:52:14 ET

Summary

• The freight market in the USA remains challenging, but Radiant Logistics' adjusted EBITDA for Q1 FY24 was unchanged thanks to an improvement in margins.
• RLGT's net cash position grew by $4.8 million, and this means it can continue growing through M&A even in a tough macroeconomic environment.
• I’m optimistic that adjusted EBITDA could be back to around $15 million by the end of FY24.

Introduction

I've been following US logistics company Radiant Logistics ( RLGT ) closely and I've written 5 articles about it on SA to date. The latest of them was in September when I said that the company looked cheap and that we could be near the bottom of the cycle in the freight market.

On November 9, Radiant Logistics released its financials for Q1 FY24 (ended September) and I think they were decent as adjusted EBITDA remained at the levels of Q4 FY23 despite the freight market in the USA remaining challenging and revenues dropping by 9.2% quarter on quarter. While it's taking more time for the cycle to shift to growth than I expected, I think the company is performing well in this challenging market environment and that it looks undervalued at below 7x annualized EV/EBITDA. Let's review.

Overview of the Q1 FY24 financial results

In case you aren't unfamiliar with Radiant Logistics or my earlier coverage, here's a short description of the business. The company specializes in air and ocean freight forwarding and truckload, less-than-truckload, and intermodal freight brokerage solutions and it operates under several brands - Radiant, Airgroup, and Navegate to name a few. The reason for this is that Radiant Logistics has been relying on M&A to fuel its growth over its 17 years of existence and its latest acquisition included its Florida-based logistics partner Daleray in October. The latter has been operating under the company's Distribution By Air brand since 2014. The majority of the revenues of Radiant Logistics come from freight forwarding and I think that focusing on inorganic growth makes a lot of sense as this is an asset-light business with low barriers to entry and therefore thin operating margins. Growing rapidly through M&A requires relatively low investments and enables the company to capture economies of scale. Between FY06 and FY23, the compound annual growth rate ((CAGR)) for gross revenue was 24.4% while the CAGR for adjusted EBITDA stood at 31.2%. Yet, the freight market is notoriously cyclical which means that keeping a strong balance sheet to weather storms is crucial. The latest downturn started in FY23 and continues to this day as shipping companies are still managing through elevated inventories following overstocking after major global supply chain disruptions.

Looking at the Q1 FY24 financial results of Radiant Logistics, we can see that revenues slumped by 36.3% year on year to $210.8 million while adjusted EBITDA was less than half of the level from a year earlier. Yet, it's worth noting that Q1 FY23 is a tough comparison as the business got a strong boost from COVID-19 test kit chartering back then. Compared to Q4 FY23, the numbers look well as adjusted EBITDA inched down by just 0.4% despite a 9.2% fall in revenues. The adjusted EBITDA margin thus improved to 15.1% from 13.9% a quarter earlier.

Turning our attention to the balance sheet, the slowdown of the business led to a $10.4 million quarter on quarter decrease in receivables which boosted free cash flow to $5.4 million as accounts payable went down by just $4.1 million. The company repurchased 35,349 shares at an average cost of $6.52 per share during the quarter and further strengthened its balance sheet as the net cash position grew to $31.4 million from $26.6 million in Q4 FY23. However, I think that this number could be below $20 million at the moment due to the purchase of Daleray as well as the repurchase of 446,652 shares for $2.6 million between October 1 and November 3 (source here ).

Overall, I think this was a decent quarter for Radiant Logistics considering the US freight sector is still struggling - the adjusted EBITDA margin improved while the balance sheet remained strong. In addition, the company said once again during its quarterly earnings call that we could be at or near the bottom of the cycle and I'm optimistic that revenues and adjusted EBITDA will return to growth in a quarter or two.

Turning our attention to the valuation, Radiant Logistics has an enterprise value ((EV)) of $250.9 million as of the time of writing and is trading at an EV/EBITDA ratio of 6.8x based on the annualized adjusted EBITDA for Q1 FY24. Considering this is a business with a strong balance sheet with a normalized annual run rate EBITDA of $50 million to $60 million and we could be near the bottom of the cycle, I think Radiant Logistics should be valued at somewhere around 10x EV/EBITDA based on the annualized adjusted EBITDA for Q1 FY24. This translates into around $7.31 per share or an upside potential of 18.9%. In my view, there is a decent margin of safety here and I'm keeping my rating on Radiant Logistics at speculative buy.

Looking at the downside risks, I think the major one is that I could be over-optimistic about the recovery of the US freight sector. It's possible that high interest rates lead to slowing economic growth over the coming months, and this will delay the recovery of the freight market in the country. While the USA has managed to avoid a recession in 2023, the consensus among analysts is that there is likely to be a mild recession in 2024.

Investor takeaway

The US freight market is continuing to struggle but I think Radiant Logistics is weathering the storm well as adjusted EBITDA for Q1 FY24 was flat compared to Q4 FY23 thanks to a slight improvement in margins. The company continues to believe that the market is close to returning to growth and its balance sheet remains solid. This should enable it to continue growing through M&A even in a tough macroeconomic environment and I'm optimistic that quarterly adjusted EBITDA could be back to around $15 million by the end of FY24.

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