Description
Brief Business Description:
Panalpina is the world's fourth largest freight forwarder. The company facilitates the shipping and tracking of goods by offering its customers the following services: the sourcing and supervision of door to door transport via a combination of air and ocean, the supervision & organization of customs clearance, the sourcing of warehousing, and the tracking & general logistics of freight. Unlike some of its competitors, PWTN does not own any of the equipment that is used to ship the goods and as such is a pure service organization. Business Mix (as % of gross profit): Airfreight ~45%, Ocean Freight ~30%, Logistics ~25%.
Investment Thesis:
Panalpina is down ~30% both year to date and from its 52 week high of CHF 132 and is currently selling for ~8X EV/Fwd EBit est. On a relative basis, this compares favorably to:
A) To historical private market values paid in cash by industrial buyers that have been closer to 16X EV/EBIT
| Private Market Multiples |
| |
EV/Sales |
EV/EBITDA |
EV/EBIT |
EV/LTM NI |
| Max |
3.1 |
41.4 |
46.0 |
102.5 |
| Median |
0.5 |
9.3 |
16.6 |
26.0 |
| Average |
0.6 |
11.6 |
18.3 |
30.8 |
| Min |
0.1 |
3.1 |
7.9 |
11.3 |
B) Its comps that are trading on average at 11X EV/Fwd Ebit
| |
|
Comparables 2012 Estimates |
| Valuation Ratios |
PWTN |
KNIN |
CHRW |
EXPD |
DSV |
UTIW |
| EV/Sales |
0.22 |
0.61 |
0.92 |
1.07 |
0.58 |
0.27 |
| EV/EBITDA |
6.61 |
11.2 |
12.7 |
9.9 |
8.6 |
6.0 |
| EV/EBIT |
8.02 |
14.1 |
13.3 |
10.5 |
10.5 |
8.4 |
| EV/NOPAT |
10.76 |
17.9 |
21.5 |
17.4 |
14.4 |
12.4 |
| P/CFFO |
|
13.32 |
13.9 |
20.3 |
18.9 |
8.9 |
8.3 |
| P/FCF |
|
19.04 |
18.4 |
22.0 |
22.5 |
10.9 |
12.6 |
| P/E |
|
14.62 |
19.1 |
22.2 |
19.8 |
12.7 |
13.2 |
At the current price of ~89 CHF a 3 to 5 year investment in the company should offer the attractive combination of a downside risk of ~10-15% and an upside potential of ~45-100%
| Scenario |
Intrinsic |
% Chge |
CHF Up vs. Down |
Method |
| Worst |
CHF 76 |
-15% |
-CHF 13.4 |
10X Est. of Trough NOPAT |
| |
|
|
|
|
| Base |
CHF 127 |
42% |
CHF 37.6 |
15X Conservative Est of Normal EBIT (Private Market Transaction Comp)* |
| |
|
|
|
|
| Best |
CHF 173 |
94% |
CHF 83.6 |
0.5X Sales (Private Market Transaction Comp) |
| |
|
|
|
|
| Note: Management is guiding for EBITDA margins to increase to 20%. Margin increase is not taken into account in base case. |
Potential Reasons for mispricing:
1) Panalpina's record and reputation are tainted because the company is coming out of a very difficult couple of years:
a) 2006: the CEO and COB resign following an accounting fraud
b) 2007-2010 US DOJ sues the company for breach of the foreign corrupt practices act
c) 2008 the US DOJ sues the company for antitrust breaches of the US Sherman act.
2) The company's 08-10 EBITDA & EBIT numbers offer a flawed view of the potential downside to earnings, because the company was booking large "one time" costs (legal, compliance, &fines)above the EBITDA line as a result of being investigated by the DOJ & SEC for corruption in Nigeria and separately for violations of the antitrust law. These issues are behind the company with the FCPA case settled in Nov 2010 for $82mln and the antitrust case settled in Oct 2010 for $12mln. Antitrust cases were also dropped in Canada in Australia but remain outstanding in Europe. (I am adjusting my EV down by CHF50mln in order to provision for the potential liability). See below for contrast between reported numbers and adjusted / normalized numbers:
| Period |
|
2006 |
2007 |
2008 |
2009 |
2010 |
| Ebit reported |
261 |
299.4 |
193 |
29.9 |
15.4 |
| margin |
|
3.40% |
3.50% |
2.20% |
0.50% |
0.20% |
| gr |
|
|
15% |
-36% |
-85% |
-48% |
| |
|
|
|
|
|
|
| Normalized EBIT est |
210 |
249 |
150 |
96 |
160 |
| margin |
|
2.70% |
2.90% |
1.70% |
1.60% |
2.20% |
| gr |
|
|
18.50% |
-39.80% |
-35.80% |
66.40% |
3) In addition to the flawed view created by historical EBITDA, the company's historical -80% stock price performance from beginning 08 to the trough of 2009 offers an even greater distortion as it was severely affected by the uncertainty that surrounded the potential for a huge FCPA fine. Siemens had recently agreed to pay $1bn in an FCPA case and analysts and legal experts were estimating the potential fine to run in the several hundreds of millions USD.
4) Sell Side Analysts have downgraded the stock on the basis that near term the market is going to be focused on its historical record:
Morgan Stanley - downgrade to underweight Sept 30th, 2011 "We believe Panalpina has excellent long term opportunities and a sensible strategy. However, its execution record is mixed, in particular during the downturn of 2009. As a result, near term the market is likely to focus on the risks. In our base case stagnation scenario we see 16% upside but 45% downside in our "mild recession" b ear case.
5) Panalpina is more illiquid than its CHF1.8Bn market cap suggests with an average daily volume of ~CHF4.4mln due to the fact that 40% of its shares are held by the Ernst Goehner Foundation (the former owner's charitable foundation); Cevian Capital, a Swedish activist owns ~10% of the shares; the company owns another 5 % of the shares. Any selling or buying has accordingly a disproportionate impact on the available float.
Risks to thesis:
- Global Recession / Systemic Crisis: While a global crisis would have a significant impact on PWTN's underlying profitability its asset light business model , ~85% variable cost structure and net cash balance of ~500mln CHF should provide the company with long term staying power.
Competitive Advantage Analysis:
1) Do historical quantitative measures such as ROIC & Market Share point to the presence of a sustainable competitive advantage? Yes
A) Historical ROIC:
| Returns: |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
| ROIC pre tax (adj. EBIT) |
35.8% |
31.7% |
27.1% |
21.9% |
20.8% |
36.6% |
37.9% |
28.6% |
34.8% |
58.8% |
| ROIC pre tax incl Gwill |
30.0% |
27.5% |
24.0% |
18.6% |
17.5% |
31.0% |
33.6% |
25.1% |
27.6% |
45.7% |
| ROIC after tax incl Gwill |
22.5% |
20.6% |
18.0% |
14.0% |
13.1% |
23.3% |
25.2% |
18.8% |
20.7% |
34.3% |
*Returns above are adjusted for accounting restatements, Nigeria business termination, Antitrust fines, and FCPA fines.
B) Market Share: Given the highly fragmented nature of the industry, what counts until the industry consolidates further is their relative market share advantage versus the Mom & Pops who make up >60% of the industry.
| Mkt Share |
2003 |
2007 |
| Air Freight |
% Share |
Rank |
% Share |
Rank |
| Panalpina |
5.50% |
2 |
3.20% |
3 |
| |
|
|
|
|
| DPWN |
6.30% |
1 |
8.80% |
|
| Nippon |
5.30% |
3 |
|
|
| Exel |
4.80% |
4 |
|
|
| Kuhne & Nagel |
3.30% |
5 |
2.60% |
|
| Schenker |
3.30% |
6 |
4.50% |
|
| Bax Global |
3.10% |
7 |
|
|
| Kintetsu |
2.90% |
8 |
|
|
| Eagle /Circle |
1.80% |
9 |
|
|
| Others |
66.60% |
|
|
|
| |
|
|
|
|
| Ocean Freight (TEUs) |
% share |
Rank |
% Share |
Rank |
| Panalpina |
4% |
3 |
2.9% |
4 |
| |
|
|
|
|
| Kuhne & Nagel |
7% |
1 |
6.4% |
1 |
| DPWN |
5% |
2 |
6.2% |
2 |
| Schenker |
4% |
3 |
3.5% |
3 |
| Exel |
3% |
4 |
|
|
| Others |
77% |
|
|
|
| 2010 |
| Combined AIR/OCEAN Share of Turnover |
|
| DHL |
6.0% |
| K+N |
5.0% |
| DB Schenker |
3.0% |
| Panalpina |
3.0% |
| UPS SCS |
2.8% |
| Expeditors |
2.7% |
| CEVA |
2.6% |
| DSV |
2.0% |
| Sinotrans |
1.8% |
| Agility |
1.8% |
| Top 10 |
30.7% |
| |
|
| Rest |
69.300% |
Qualitative Analysis:
What are the basic activities that make up the business?
PWTN's business is made up of the following activities & competitive advantages:
- The sourcing, purchase and provision of general transportation capacity (Container Shipping, Air Freight Companies) - greater bargaining power and relative cost advantage through economies of scale relative to smaller competitors on routes where it has a significant market share.
- The sourcing, purchase and provision of specialized transportation solutions (Refrigerated transport for Hcare & Food, Transport of oversized equipment to remote locations in the oil service industry etc.) - in specialized services the company may be able to provide services that others cannot match in terms of speed & cost especially if has a significant market share relative to a specific provider.
- The Sourcing & Purchase of Warehousing capacity - some bargaining power & economies of scale
- Maintaining teams on the ground to facilitate customs clearing-relative cost advantage versus smaller players due to the economies of scale that are created by market share.
- Supply Chain Management Services such as the real time tracking of goods -economies of scale on IT - they spend roughly 50mln CHF per annum on capex & intangibles. This is clearly as source of advantage relative to Mom & Pops.
- Customer service to existing customers
- Sales to existing and prospective customers - there are search costs associated with the services and customers are probably willing to pay a bit more in order to be guaranteed that they are not making a mistake and shipping with a no name shipper.
Conclusion: Most of their advantages reside in the economies of scale that they can garner relative to the Mom & Pop operations that make up roughly 60% of the industry. This competitive advantage is not obviously true relative to the top 8 players.
Top Line Analysis:
A) % of Revenues that are recurring: customers are recurring but sales levels vary based on volumes and freight rates so it is difficult to think of it in those terms.
B) Pricing Power: PWTN's model is a cost + model and as such has historically been able to increase prices in line with underlying inflation. Conversely as prices decline PWTN's revenues decline. Pricing of services lags prices of 3rd party transport costs by a couple of months. See Gross Profit Margin discussion below.
C) Top line growth can be broken down into two main categories: Volumes & Price
A) Within Volumes there are two main categories driving growth:
- The growth of global airfreight: Over the past ten years the growth rate has been ~3.5% per annum. Excluding the 08-10 interval, growth rates were around 6% or in line with the growth of world trade. Airfreight tends to be more volatile than Container Freight/Sea Freight. Forward estimates are ~5%.
- The growth of container shipping: Since the 1980s volumes have grown at a 2x multiple of world trade. This is due to the fact to the increased penetration of container shipping (currently ~95% of tonnage shipped) & due to the increase in long haul intercontinental transport due to globalization.
Over the past ten years global container gr ~8.5% and closer to 10.5% if you exclude the past 08-10 interval. Over the next 5 years, forward forecasts are 6.6% IHS & 7.4% Drewery.
B) Freight rates drive prices that PWTN can charge to its customers:
- Freight rates tend to be highly volatile due to the fixed cost nature of the underlying operators who tend to be willing to operate at a loss in order to preserve or gain market share.
- All things being equal new capacity creates downward pressure on rates and we are currently in a period of overcapacity which should exert continued downward pricing.
- Operators are expected to remove capacity from the market in order to rationalize the current pricing environment.
Gross Profit Margin:
PWTN's gross profit is a function of the differential in rates paid to owner operators and those charged to PWTN's customers. Historically, the gross profit margin has offered a countercyclical effect to overall profits because rates charged to PWTN's customers lag by a couple of months the rates that are paid to owner operators. Accordingly, profit margins have been quite stable in spite of the volatility of freight rates.
Cost Structure / Operating Leverage:
The majority of costs lie in the COGS line i.e. in the cost of providing 3rd party transport services. These have historically represented ~80% of revenues. Because of the lag that exists between revenues and COGS, I am modelling the operating leverage in the business using the following assumptions:
1) COGS grow at 1.15X the rate of Revenues
2) Personnel Expenses are 30% variable
3) Other Opex is only 10% variable
| Cost Structure Analysis |
|
2010 |
|
|
Operating Leverage Scenario Analysis |
| |
|
|
|
|
|
|
Worst |
|
Base |
|
Best |
| Revenue net of customs duties |
7,164,161 |
|
|
5,957,913 |
|
7,271,623 |
|
7,880,577 |
| |
|
|
|
|
|
|
-16.8% |
|
1.5% |
|
10% |
| |
|
|
|
|
|
|
|
|
|
|
|
| -COGS (Fwding Svcs from 3rd parties) |
5,684,084 |
|
|
4,583,484 |
|
5,782,134 |
|
6,315,017 |
| % of sales |
|
|
79.3% |
|
|
-19.4% |
|
1.7% |
|
11.100% |
| gr/gr of sales |
|
|
|
|
|
115% |
|
115% |
|
111% |
| |
|
|
|
|
|
|
|
|
|
|
|
| =Gross Profit |
|
|
1,480,077 |
|
|
1,374,429 |
|
1,489,489 |
|
1,565,560 |
| margin |
|
|
|
20.7% |
|
|
23.1% |
|
20.5% |
|
19.9% |
| |
|
|
|
|
|
|
|
|
|
|
|
| -Personnel Expenses |
|
890,937 |
|
|
845,934 |
|
894,946 |
|
917,665 |
| % of Sales |
|
|
12.4% |
|
|
14.2% |
|
12.3% |
|
11.6% |
| |
|
|
|
|
|
|
|
|
|
|
|
| -Opex Adjusted for Fines & Legal |
381,051 |
|
|
374,635 |
|
381,623 |
|
384,862 |
| % of Sales |
|
|
5.3% |
|
|
6.29% |
|
5.25% |
|
4.88% |
| |
|
|
|
|
|
|
|
|
|
|
|
| =EBITDA |
|
|
|
208,089 |
|
|
153,860 |
|
212,920 |
|
263,033 |
| margin |
|
|
|
2.9% |
|
|
2.6% |
|
2.9% |
|
3.3% |
| /GP |
|
|
|
14.1% |
|
|
11.2% |
|
14.3% |
|
16.8% |
| |
|
|
|
|
|
|
|
|
|
|
|
| -Maint Capex est. |
|
|
50,000 |
|
|
50,000 |
|
50,000 |
|
50,000 |
| % of sales |
|
|
0.7% |
|
|
0.8% |
|
0.7% |
|
0.6% |
| % of EBITDA |
|
|
24.0% |
|
|
32.5% |
|
23.5% |
|
19.0% |
| |
|
|
|
|
|
|
|
|
|
|
|
| = True EBIT est |
|
|
158,089 |
|
|
103,860 |
|
162,920 |
|
213,033 |
| margin |
|
|
|
2.2% |
|
|
1.7% |
|
2.2% |
|
2.7% |
| /GP |
|
|
|
10.7% |
|
|
7.6% |
|
10.9% |
|
13.6% |
| |
|
|
|
|
|
|
|
|
|
|
|
| -Tax est. |
|
|
|
39,522 |
|
|
25,965 |
|
40,730 |
|
53,258 |
| rate |
|
|
|
25.0% |
|
|
25.0% |
|
25.0% |
|
25.0% |
| |
|
|
|
|
|
|
|
|
|
|
|
| =NOPAT |
|
|
|
118,567 |
|
|
77,895 |
|
122,190 |
|
159,775 |
| margin |
|
|
|
1.7% |
|
|
1.3% |
|
1.7% |
|
2.0% |
| gr |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Fixed vs. Variable Cost Estimates: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Personnel Expenses |
|
890,937 |
|
|
Opex Adjustments from reported: |
|
| % Variable |
|
|
30% |
|
|
SG&A |
|
|
|
527,051 |
| % Fixed |
|
|
|
70% |
|
|
+Fines & Restructuring |
|
(128,000) |
| |
|
|
|
|
|
|
+Legal Costs (FCPA, Antitrust) |
|
(18,000) |
| Opex |
|
|
|
381,051 |
|
|
Normalized SG&A |
|
381,051 |
| % Variable |
|
|
10% |
|
|
|
|
|
|
|
| % Fixed |
|
|
|
90% |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Total Costs |
|
|
1,271,988 |
|
|
|
|
|
|
|
| Variable |
|
|
|
305,386 |
|
|
|
|
|
|
|
| Fixed |
|
|
|
966,602 |
|
|
|
|
|
|
|
| % Variable |
|
|
24% |
|
|
|
|
|
|
|
| % Fixed |
|
|
|
76% |
|
|
|
|
|
|
|
Management:
A) Profile:
CEO: Monika Ribar (51) is also responsible for Corporate & Regional Development, Corporate Compliance, Corporate Communications, Panprojects and Agent Relations. She has been with the group since 91 and has had roles in IT, Controlling and Global Project Management. From 00-05 she was a member of the board and was the Chief Information Officer. In 05, she was appointed CFO and then CEO in June of 2006. She holds a degree in Finance and Controlling from the University of St Gallen & and participated in an executive program of Stanford Graduate School of Business in 99.
CFO: Marco Gadola (48) joined as a member of the executive board in September 2008. Responsible for Corporate Finance, Controlling, Investor Relations, Strategic Finance & Projects, Indirect Purchasing and IT. Prior to PWTN, he was group CFO and EVP of Operations at Straumann Holding, a Swiss based dental & oral technology company; prior to that he was group CFO of the Swiss based consumer foods company HERO. He also held leading management positions at the Hilti Group, which manufactures and sells products for the construction and building industries.
Chief Legal & Corporate Secretary: Christoph Hess (56) joined the group's head office in 94 as Secretary of the Board of Directors and the Executive Board. In this capacity he also manages both the Group's Legal and Insurance Departments. Used to manage corporate communications until August 2008.
Chief HR: Alastair Robertson (51) Member of the board since April 2008 he is responsible for HR. Joined in 07 as Head of Global HR. Before Joining Panalpina, he was with Tetra as a VP of HR dealing with the Americas from 99-01 and with Europe & Africa from 02-04. From 92-96 he worked for WH Smith in the field of Personnel, Development and Training. He has an MBA in strategy and marketing from the University of Huddersfield, Bradford (UK). He also attended the Royal School of Military Engineering and the Royal Military Academy (Not sure if he got a degree...)\
COO: Karl Weyeneth (47) is a member of the board since 2008 and responsible for Air Freight, Ocean Freight, Logitistics, Supply Chain Solutions, Industry Verticals, Sales & Marketing and Business Process Quality. Joined in 07, as regional CEo for the US. Has 15 years of experience in leaderhsip including freight management, 3PL and contract logistics. He used to be President and CEO of Americas fro Hellmann Worldwide Logistics and prior to this he was EVP and CFO of Danzas Management Latin America. He has a bachelor in economics and business administration from the University of Berne.
New Global Head of Sea Freight: Franck Hercksen, 26 years of experience within freight forwarding, most recently at Kuehne & Nagel where he was SVP of Sea Freight for N. America.
New Global Head of Air Freight: Henrik Lund, 28 years' experience within the industry, most recently at DHL Global Forwarding where he was global head of the consumer division.
New Global Head of Logistics: 20 years of experience. Most recently at Timex Group where he was SVP Global Supply Chain and Manufacturing operations.
B) Track Record of Value Creation:
Nothing to write home about. Since Monika Ribar has been in place the total return has been -9% on annualized basis for a total loss of about 35% inclusive of dividends.
The total return for a position in Straumann Holding the company where the current CFO used to be CFO is also not very good with a -11% return since October 2006.
C) Compensation:
CEO:
2010: Total Comp: 2.3Mln CHF (Salary 800K, Bonus 730K, Shares 633K, Social Security 110)
2009: 0.936MLn CHF (Salary 800K, No Bonus, Social Security 109)
D) Alignment: Not very compelling - Shares owned seem to be limited relative to the CEO's annual compensation. Also, the nature of the share / option plan is not ideal because:
a) While shares are not given, they can be purchased with a 25% discount to the average share price from Jan to May.
b) For every share purchased they also get an option free of charge with a 6 year life that vests anywhere between 1-3 years after the award. The strike price of the option is at the market price or average market price over a period.
| Current Price |
89.4 |
|
Intrinsic Per Share |
130 |
|
| |
|
|
|
|
|
| Name |
Role |
Shares |
YOY Change |
Current Value |
Intrinsic Value |
| M Ribar |
CEO |
21,063 |
3,584 |
1,883,032 |
2,738,190 |
| C Hess |
G Counsel |
3,000 |
(1,218) |
268,200 |
390,000 |
| K Weyeneth |
COO |
5,315 |
2,836 |
475,161 |
690,950 |
| M Gadola |
CFO |
2,572 |
(5,746) |
229,937 |
334,360 |
| A Robertson |
HR |
2,200 |
800 |
196,680 |
286,000 |
| Total |
|
34,150 |
256 |
3,053,010 |
4,439,500 |
| Share Counts are as of Dec 31st, 2010 |
|
|
|
|
| |
|
|
|
|
|
| M Ribar |
CEO |
17,479 |
1,562,623 |
2,272,270 |
|
| C Hess |
G Counsel |
4,218 |
377,089 |
548,340 |
|
| K Weyeneth |
COO |
2,479 |
221,623 |
322,270 |
|
| M Gadola |
CFO |
8,318 |
743,629 |
1,081,340 |
|
| A Robertson |
HR |
1,400 |
125,160 |
182,000 |
|
| Total |
|
33,894 |
3,030,124 |
4,406,220 |
|
| Share Counts are as of Dec 31st, 2009 |
|
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
| |
Options Outstanding |
Strike |
Expiry Date |
|
|
| |
34,500 |
112 |
2,012 |
|
|
| |
32,089 |
206 |
2,013 |
|
|
| |
34,857 |
131 |
2,014 |
|
|
| |
58,793 |
64 |
2,015 |
|
|
| |
13,453 |
97 |
2,016 |
|
|
| |
173,692 |
116 |
|
|
|
Options that remain outstanding have for the most part a much higher strike price than current share price, but they did not pay for them....
Accounting:
1)The company restated some of its financials in 06-07 due to a covered up accounting irregularity that arose from an employee booking capacity at too high a cost and then trying to cover up his mistake. Former CEO Bruno Sidler had to resign.
Catalyst
Brief Business Description:
Panalpina is the world's fourth largest freight forwarder. The company facilitates the shipping and tracking of goods by offering its customers the following services: the sourcing and supervision of door to door transport via a combination of air and ocean, the supervision & organization of customs clearance, the sourcing of warehousing, and the tracking & general logistics of freight. Unlike some of its competitors, PWTN does not own any of the equipment that is used to ship the goods and as such is a pure service organization. Business Mix (as % of gross profit): Airfreight ~45%, Ocean Freight ~30%, Logistics ~25%.
Investment Thesis:
Panalpina is down ~30% both year to date and from its 52 week high of CHF 132 and is currently selling for ~8X EV/Fwd EBit est. On a relative basis, this compares favorably to:
A) To historical private market values paid in cash by industrial buyers that have been closer to 16X EV/EBIT
Private Market Multiples
EV/Sales
EV/EBITDA
EV/EBIT
EV/LTM NI
Max
3.1
41.4
46.0
102.5
Median
0.5
9.3
16.6
26.0
Average
0.6
11.6
18.3
30.8
Min
0.1
3.1
7.9
11.3
B) Its comps that are trading on average at 11X EV/Fwd Ebit
Comparables 2012 Estimates
Valuation Ratios
PWTN
KNIN
CHRW
EXPD
DSV
UTIW
EV/Sales
0.22
0.61
0.92
1.07
0.58
0.27
EV/EBITDA
6.61
11.2
12.7
9.9
8.6
6.0
EV/EBIT
8.02
14.1
13.3
10.5
10.5
8.4
EV/NOPAT
10.76
17.9
21.5
17.4
14.4
12.4
P/CFFO
13.32
13.9
20.3
18.9
8.9
8.3
P/FCF
19.04
18.4
22.0
22.5
10.9
12.6
P/E
14.62
19.1
22.2
19.8
12.7
13.2
At the current price of ~89 CHF a 3 to 5 year investment in the company should offer the attractive combination of a downside risk of ~10-15% and an upside potential of ~45-100%
Scenario
Intrinsic
% Chge
CHF Up vs. Down
Method
Worst
CHF 76
-15%
-CHF 13.4
10X Est. of Trough NOPAT
Base
CHF 127
42%
CHF 37.6
15X Conservative Est of Normal EBIT (Private Market Transaction Comp)*
Best
CHF 173
94%
CHF 83.6
0.5X Sales (Private Market Transaction Comp)
Note: Management is guiding for EBITDA margins to increase to 20%. Margin increase is not taken into account in base case.
Potential Reasons for mispricing:
1) Panalpina's record and reputation are tainted because the company is coming out of a very difficult couple of years:
a) 2006: the CEO and COB resign following an accounting fraud
b) 2007-2010 US DOJ sues the company for breach of the foreign corrupt practices act
c) 2008 the US DOJ sues the company for antitrust breaches of the US Sherman act.
2) The company's 08-10 EBITDA & EBIT numbers offer a flawed view of the potential downside to earnings, because the company was booking large "one time" costs (legal, compliance, &fines)above the EBITDA line as a result of being investigated by the DOJ & SEC for corruption in Nigeria and separately for violations of the antitrust law. These issues are behind the company with the FCPA case settled in Nov 2010 for $82mln and the antitrust case settled in Oct 2010 for $12mln. Antitrust cases were also dropped in Canada in Australia but remain outstanding in Europe. (I am adjusting my EV down by CHF50mln in order to provision for the potential liability). See below for contrast between reported numbers and adjusted / normalized numbers:
Period
2006
2007
2008
2009
2010
Ebit reported
261
299.4
193
29.9
15.4
margin
3.40%
3.50%
2.20%
0.50%
0.20%
gr
15%
-36%
-85%
-48%
Normalized EBIT est
210
249
150
96
160
margin
2.70%
2.90%
1.70%
1.60%
2.20%
gr
18.50%
-39.80%
-35.80%
66.40%
3) In addition to the flawed view created by historical EBITDA, the company's historical -80% stock price performance from beginning 08 to the trough of 2009 offers an even greater distortion as it was severely affected by the uncertainty that surrounded the potential for a huge FCPA fine. Siemens had recently agreed to pay $1bn in an FCPA case and analysts and legal experts were estimating the potential fine to run in the several hundreds of millions USD.
4) Sell Side Analysts have downgraded the stock on the basis that near term the market is going to be focused on its historical record:
Morgan Stanley - downgrade to underweight Sept 30th, 2011 "We believe Panalpina has excellent long term opportunities and a sensible strategy. However, its execution record is mixed, in particular during the downturn of 2009. As a result, near term the market is likely to focus on the risks. In our base case stagnation scenario we see 16% upside but 45% downside in our "mild recession" b ear case.
5) Panalpina is more illiquid than its CHF1.8Bn market cap suggests with an average daily volume of ~CHF4.4mln due to the fact that 40% of its shares are held by the Ernst Goehner Foundation (the former owner's charitable foundation); Cevian Capital, a Swedish activist owns ~10% of the shares; the company owns another 5 % of the shares. Any selling or buying has accordingly a disproportionate impact on the available float.
Risks to thesis:
Global Recession / Systemic Crisis: While a global crisis would have a significant impact on PWTN's underlying profitability its asset light business model , ~85% variable cost structure and net cash balance of ~500mln CHF should provide the company with long term staying power.
Competitive Advantage Analysis:
1) Do historical quantitative measures such as ROIC & Market Share point to the presence of a sustainable competitive advantage? Yes
A) Historical ROIC:
Returns:
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
ROIC pre tax (adj. EBIT)
35.8%
31.7%
27.1%
21.9%
20.8%
36.6%
37.9%
28.6%
34.8%
58.8%
ROIC pre tax incl Gwill
30.0%
27.5%
24.0%
18.6%
17.5%
31.0%
33.6%
25.1%
27.6%
45.7%
ROIC after tax incl Gwill
22.5%
20.6%
18.0%
14.0%
13.1%
23.3%
25.2%
18.8%
20.7%
34.3%
*Returns above are adjusted for accounting restatements, Nigeria business termination, Antitrust fines, and FCPA fines.
B) Market Share: Given the highly fragmented nature of the industry, what counts until the industry consolidates further is their relative market share advantage versus the Mom & Pops who make up >60% of the industry.
Mkt Share
2003
2007
Air Freight
% Share
Rank
% Share
Rank
Panalpina
5.50%
2
3.20%
3
DPWN
6.30%
1
8.80%
Nippon
5.30%
3
Exel
4.80%
4
Kuhne & Nagel
3.30%
5
2.60%
Schenker
3.30%
6
4.50%
Bax Global
3.10%
7
Kintetsu
2.90%
8
Eagle /Circle
1.80%
9
Others
66.60%
Ocean Freight (TEUs)
% share
Rank
% Share
Rank
Panalpina
4%
3
2.9%
4
Kuhne & Nagel
7%
1
6.4%
1
DPWN
5%
2
6.2%
2
Schenker
4%
3
3.5%
3
Exel
3%
4
Others
77%
2010
Combined AIR/OCEAN Share of Turnover
DHL
6.0%
K+N
5.0%
DB Schenker
3.0%
Panalpina
3.0%
UPS SCS
2.8%
Expeditors
2.7%
CEVA
2.6%
DSV
2.0%
Sinotrans
1.8%
Agility
1.8%
Top 10
30.7%
Rest
69.300%
Qualitative Analysis:
What are the basic activities that make up the business?
PWTN's business is made up of the following activities & competitive advantages:
The sourcing, purchase and provision of general transportation capacity (Container Shipping, Air Freight Companies) - greater bargaining power and relative cost advantage through economies of scale relative to smaller competitors on routes where it has a significant market share.
The sourcing, purchase and provision of specialized transportation solutions (Refrigerated transport for Hcare & Food, Transport of oversized equipment to remote locations in the oil service industry etc.) - in specialized services the company may be able to provide services that others cannot match in terms of speed & cost especially if has a significant market share relative to a specific provider.
The Sourcing & Purchase of Warehousing capacity - some bargaining power & economies of scale
Maintaining teams on the ground to facilitate customs clearing-relative cost advantage versus smaller players due to the economies of scale that are created by market share.
Supply Chain Management Services such as the real time tracking of goods -economies of scale on IT - they spend roughly 50mln CHF per annum on capex & intangibles. This is clearly as source of advantage relative to Mom & Pops.
Customer service to existing customers
Sales to existing and prospective customers - there are search costs associated with the services and customers are probably willing to pay a bit more in order to be guaranteed that they are not making a mistake and shipping with a no name shipper.
Conclusion: Most of their advantages reside in the economies of scale that they can garner relative to the Mom & Pop operations that make up roughly 60% of the industry. This competitive advantage is not obviously true relative to the top 8 players.
Top Line Analysis:
A) % of Revenues that are recurring: customers are recurring but sales levels vary based on volumes and freight rates so it is difficult to think of it in those terms.
B) Pricing Power: PWTN's model is a cost + model and as such has historically been able to increase prices in line with underlying inflation. Conversely as prices decline PWTN's revenues decline. Pricing of services lags prices of 3rd party transport costs by a couple of months. See Gross Profit Margin discussion below.
C) Top line growth can be broken down into two main categories: Volumes & Price
A) Within Volumes there are two main categories driving growth:
The growth of global airfreight: Over the past ten years the growth rate has been ~3.5% per annum. Excluding the 08-10 interval, growth rates were around 6% or in line with the growth of world trade. Airfreight tends to be more volatile than Container Freight/Sea Freight. Forward estimates are ~5%.
The growth of container shipping: Since the 1980s volumes have grown at a 2x multiple of world trade. This is due to the fact to the increased penetration of container shipping (currently ~95% of tonnage shipped) & due to the increase in long haul intercontinental transport due to globalization.
Over the past ten years global container gr ~8.5% and closer to 10.5% if you exclude the past 08-10 interval. Over the next 5 years, forward forecasts are 6.6% IHS & 7.4% Drewery.
B) Freight rates drive prices that PWTN can charge to its customers:
Freight rates tend to be highly volatile due to the fixed cost nature of the underlying operators who tend to be willing to operate at a loss in order to preserve or gain market share.
All things being equal new capacity creates downward pressure on rates and we are currently in a period of overcapacity which should exert continued downward pricing.
Operators are expected to remove capacity from the market in order to rationalize the current pricing environment.
Gross Profit Margin:
PWTN's gross profit is a function of the differential in rates paid to owner operators and those charged to PWTN's customers. Historically, the gross profit margin has offered a countercyclical effect to overall profits because rates charged to PWTN's customers lag by a couple of months the rates that are paid to owner operators. Accordingly, profit margins have been quite stable in spite of the volatility of freight rates.
Cost Structure / Operating Leverage:
The majority of costs lie in the COGS line i.e. in the cost of providing 3rd party transport services. These have historically represented ~80% of revenues. Because of the lag that exists between revenues and COGS, I am modelling the operating leverage in the business using the following assumptions:
1) COGS grow at 1.15X the rate of Revenues
2) Personnel Expenses are 30% variable
3) Other Opex is only 10% variable
Cost Structure Analysis
2010
Operating Leverage Scenario Analysis
Worst
Base
Best
Revenue net of customs duties
7,164,161
5,957,913
7,271,623
7,880,577
-16.8%
1.5%
10%
-COGS (Fwding Svcs from 3rd parties)
5,684,084
4,583,484
5,782,134
6,315,017
% of sales
79.3%
-19.4%
1.7%
11.100%
gr/gr of sales
115%
115%
111%
=Gross Profit
1,480,077
1,374,429
1,489,489
1,565,560
margin
20.7%
23.1%
20.5%
19.9%
-Personnel Expenses
890,937
845,934
894,946
917,665
% of Sales
12.4%
14.2%
12.3%
11.6%
-Opex Adjusted for Fines & Legal
381,051
374,635
381,623
384,862
% of Sales
5.3%
6.29%
5.25%
4.88%
=EBITDA
208,089
153,860
212,920
263,033
margin
2.9%
2.6%
2.9%
3.3%
/GP
14.1%
11.2%
14.3%
16.8%
-Maint Capex est.
50,000
50,000
50,000
50,000
% of sales
0.7%
0.8%
0.7%
0.6%
% of EBITDA
24.0%
32.5%
23.5%
19.0%
= True EBIT est
158,089
103,860
162,920
213,033
margin
2.2%
1.7%
2.2%
2.7%
/GP
10.7%
7.6%
10.9%
13.6%
-Tax est.
39,522
25,965
40,730
53,258
rate
25.0%
25.0%
25.0%
25.0%
=NOPAT
118,567
77,895
122,190
159,775
margin
1.7%
1.3%
1.7%
2.0%
gr
Fixed vs. Variable Cost Estimates:
Personnel Expenses
890,937
Opex Adjustments from reported:
% Variable
30%
SG&A
527,051
% Fixed
70%
+Fines & Restructuring
(128,000)
+Legal Costs (FCPA, Antitrust)
(18,000)
Opex
381,051
Normalized SG&A
381,051
% Variable
10%
% Fixed
90%
Total Costs
1,271,988
Variable
305,386
Fixed
966,602
% Variable
24%
% Fixed
76%
Management:
A) Profile:
CEO: Monika Ribar (51) is also responsible for Corporate & Regional Development, Corporate Compliance, Corporate Communications, Panprojects and Agent Relations. She has been with the group since 91 and has had roles in IT, Controlling and Global Project Management. From 00-05 she was a member of the board and was the Chief Information Officer. In 05, she was appointed CFO and then CEO in June of 2006. She holds a degree in Finance and Controlling from the University of St Gallen & and participated in an executive program of Stanford Graduate School of Business in 99.
CFO: Marco Gadola (48) joined as a member of the executive board in September 2008. Responsible for Corporate Finance, Controlling, Investor Relations, Strategic Finance & Projects, Indirect Purchasing and IT. Prior to PWTN, he was group CFO and EVP of Operations at Straumann Holding, a Swiss based dental & oral technology company; prior to that he was group CFO of the Swiss based consumer foods company HERO. He also held leading management positions at the Hilti Group, which manufactures and sells products for the construction and building industries.
Chief Legal & Corporate Secretary: Christoph Hess (56) joined the group's head office in 94 as Secretary of the Board of Directors and the Executive Board. In this capacity he also manages both the Group's Legal and Insurance Departments. Used to manage corporate communications until August 2008.
Chief HR: Alastair Robertson (51) Member of the board since April 2008 he is responsible for HR. Joined in 07 as Head of Global HR. Before Joining Panalpina, he was with Tetra as a VP of HR dealing with the Americas from 99-01 and with Europe & Africa from 02-04. From 92-96 he worked for WH Smith in the field of Personnel, Development and Training. He has an MBA in strategy and marketing from the University of Huddersfield, Bradford (UK). He also attended the Royal School of Military Engineering and the Royal Military Academy (Not sure if he got a degree...)\
COO: Karl Weyeneth (47) is a member of the board since 2008 and responsible for Air Freight, Ocean Freight, Logitistics, Supply Chain Solutions, Industry Verticals, Sales & Marketing and Business Process Quality. Joined in 07, as regional CEo for the US. Has 15 years of experience in leaderhsip including freight management, 3PL and contract logistics. He used to be President and CEO of Americas fro Hellmann Worldwide Logistics and prior to this he was EVP and CFO of Danzas Management Latin America. He has a bachelor in economics and business administration from the University of Berne.
New Global Head of Sea Freight: Franck Hercksen, 26 years of experience within freight forwarding, most recently at Kuehne & Nagel where he was SVP of Sea Freight for N. America.
New Global Head of Air Freight: Henrik Lund, 28 years' experience within the industry, most recently at DHL Global Forwarding where he was global head of the consumer division.
New Global Head of Logistics: 20 years of experience. Most recently at Timex Group where he was SVP Global Supply Chain and Manufacturing operations.
B) Track Record of Value Creation:
Nothing to write home about. Since Monika Ribar has been in place the total return has been -9% on annualized basis for a total loss of about 35% inclusive of dividends.
The total return for a position in Straumann Holding the company where the current CFO used to be CFO is also not very good with a -11% return since October 2006.
C) Compensation:
CEO:
2010: Total Comp: 2.3Mln CHF (Salary 800K, Bonus 730K, Shares 633K, Social Security 110)
2009: 0.936MLn CHF (Salary 800K, No Bonus, Social Security 109)
D) Alignment: Not very compelling - Shares owned seem to be limited relative to the CEO's annual compensation. Also, the nature of the share / option plan is not ideal because:
a) While shares are not given, they can be purchased with a 25% discount to the average share price from Jan to May.
b) For every share purchased they also get an option free of charge with a 6 year life that vests anywhere between 1-3 years after the award. The strike price of the option is at the market price or average market price over a period.
Current Price
89.4
Intrinsic Per Share
130
Name
Role
Shares
YOY Change
Current Value
Intrinsic Value
M Ribar
CEO
21,063
3,584
1,883,032
2,738,190
C Hess
G Counsel
3,000
(1,218)
268,200
390,000
K Weyeneth
COO
5,315
2,836
475,161
690,950
M Gadola
CFO
2,572
(5,746)
229,937
334,360
A Robertson
HR
2,200
800
196,680
286,000
Total
34,150
256
3,053,010
4,439,500
Share Counts are as of Dec 31st, 2010
M Ribar
CEO
17,479
1,562,623
2,272,270
C Hess
G Counsel
4,218
377,089
548,340
K Weyeneth
COO
2,479
221,623
322,270
M Gadola
CFO
8,318
743,629
1,081,340
A Robertson
HR
1,400
125,160
182,000
Total
33,894
3,030,124
4,406,220
Share Counts are as of Dec 31st, 2009
Options Outstanding
Strike
Expiry Date
34,500
112
2,012
32,089
206
2,013
34,857
131
2,014
58,793
64
2,015
13,453
97
2,016
173,692
116
Options that remain outstanding have for the most part a much higher strike price than current share price, but they did not pay for them....
Accounting:
1)The company restated some of its financials in 06-07 due to a covered up accounting irregularity that arose from an employee booking capacity at too high a cost and then trying to cover up his mistake. Former CEO Bruno Sidler had to resign.