|Shares Out. (in M):||28||P/E||0||0|
|Market Cap (in $M):||92||P/FCF||0||0|
|Net Debt (in $M):||511||EBIT||0||0|
Celadon (“CGIP” or the “Company”) is a Top 15 North American truckload carrier with ~$1B of revenue and a fleet of ~4,000 trucks primarily serving the over-the-road (“OTR”) segment of the market. CGIP was previously written up as a short by roc924 in November 2015 with the stock collapsing a year and a half later given accounting fraud allegations around its leasing business ultimately necessitating four years of restatements, a subsequent SEC/DoJ investigation, and eventual delisting in April 2018. We applaud the short call but believe the deck has been reset at this point with a completely new senior management team with both operational and turnaround experience (both already in full-swing), as well as a significant inflection in freight fundamentals (strongest freight cycle in a decade), and view CGIP as an intriguing long opportunity offering 100%+ upside with a number of catalysts on the horizon.
Near and intermediate-term catalysts include:
Relist on an exchange
We show CGIP could be a $6-$8 stock in the near-term under our base case scenario (~100% upside), while our upside case suggests a $16-$20 stock in the intermediate-term (400-500% upside).
*CGIP fiscal year-end is 6/30; Base case represents FY 2019 (6/30/2019); Upside case represents FY 2020 (6/30/2020)
Company Background / Timeline of Events
Historically, CGIP operated an irregular route OTR network as well as carving out a nice niche as the largest carrier for the NAFTA auto supply chain. The Company typically generated a mid-90’s operating ratio (“OR” and represents the opposite of operating margin, so 94% OR is equal to a 6% operating margin) and was viewed by investors as a solid, middle-of-pack operator.
In 2013 management shifted gears and established a leasing subsidiary called Quality Companies (“Quality”) and further expanded the business in 2014 through a transaction with Element Financial (“Element”). Quality’s business grew rapidly with its leased fleet increasing from 750 trucks at 6/30/13 to 11,300 trucks at 6/30/16. Beginning in late 2015 and persisting until early 2017, the trucking industry was plagued by a freight recession (oil collapse and resulting industrial downturn) and abundant capacity in the market. As a result, there was minimal demand for new trucks as well as a glut of used trucks leading to a significant deterioration in truck pricing. CGIP was stuck holding a massive number of trucks as Element balked at buying that much equipment, which subsequently led CGIP to form a JV called 19th Capital (beneficially owned by CGIP executives) to sell off portions of its lease portfolio.
From September 2016 through May 2017, CGIP used off-balance entities (19th Capital, Element JV) and manipulative accounting practices to misappropriate its financial condition to investors and creditors. I will not get into the specifics as Prescience Point published an extremely thorough short report outlining the fraud in April 2017 (link).
Soon after in May 2017, the Company’s auditors withdrew its reports for 6/30/16, 9/30/16 and 12/31/16 and CGIP’s COO resigned.
The turnaround effort began in July 2017 but has been a bumpy ride for CGIP.
July 2017 – Released a dual announcement that the CEO and chairman of the board will retire, while appointing Paul Svindland as the new CEO.
September 2017 – Divested its flatbed division and transferred ownership of its driving schools to a 3rd party
October/November 2017 – Appointed a new CFO, COO, and chief accounting officer
The stock worked in 2H17 as investors responded favorably to the management team reset and divestiture of non-core assets, as well as the significant inflection in freight fundamentals which began in mid-summer of 2017.
April 2018 – Announces restatements will be required for 2014-2017 financial statements after thorough review of historical accounting policies and procedures by new management team which are expected to reduce net income by $200M-$250M, while also writing down the Element JV to zero
CGIP shares declined throughout 1Q18 given additional credit agreement amendments and inability to file quarterly results; however, the next shoe to drop was on April 2, 2018 as the Company indicated it will have to restate its financials going back to 2014, with the share price cratering to ~$1.
April 2018 – Announced expected refinancing terms and new term loan partner which would include an equity component
July 2018 – Announced new credit agreement amendment, termination of term sheet with potential investment partner, operations update, and formally acknowledged on-going SEC and DoJ investigation
CGIP’s refinancing process has persisted since May 2017 as incumbent bank group lenders have agreed to amendment after amendment as the Company seeks additional capital. In April 2018 CGIP indicated that it had received a proposal from a sophisticated investment firm (GSO Capital Partners – part of Blackstone) to refinance the bank debt including an equity issuance of 19.5% of current shares outstanding. The proposed capital structure would have been a $200M term loan (at rate of L + 11%) terming out the bank revolver and a new $100M ABL facility provided by the incumbent bank group. The Company expected the refinancing to close by June 15.