Panalpina PWTN
December 18, 2011 - 11:38am EST by
DSE
2011 2012
Price: 89.00 EPS CHF5.58 CHF6.11
Shares Out. (in M): 24 P/E 15.9x 14.5
Market Cap (in $M): 2,258 P/FCF 21.5x 19.0x
Net Debt (in $M): -612 EBIT 191 208
TEV ($): 1,710 TEV/EBIT 8.9x 8.2x

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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.
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    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:

    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:

    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:

    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:

    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.
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