Description

Overview 

We are long Radiant Logistics (RLGT) and see significant upside (50-100%) over the next 6-12 months given 1) substantial upside to near-term operating results and 2) investors finally recognizing the fundamental improvement in the underlying business that CEO Bohn Crain has orchestrated over the past 4 years. RLGT is a non-asset based 3PL focused primarily on forwarding and has been written up multiples time on VIC with the last two write-ups both in 2015. Please refer to the earlier write-ups for a more detailed discussion of the business as this write-up will focus on what has changed since then and the current favorable set-up going-forward.

Current Capitalization

Diluted shares: 52.3M

Market cap: $262M

Net debt: $45M

EV: $307M

Current Situation

We detail the two components to our thesis separately as we think either of them will drive share outperformance. That said, we believe both components have a high probability of occurring.

1)    Substantial upside to near-term operating results.

• RLGT has a 6/30 fiscal year-end which means they have not yet reported June quarter results and won’t do so until the second week of September. During 2Q20 earnings season, forwarder peer results (CHRW, EXPD) were nothing short of extraordinary as COVID-related dislocation in global supply chains drove severe capacity issues in air freight markets leading to an unprecedented increase in air freight rates, forwarder profitability and massive beats vs consensus expectations. The table below shows 2Q20 results vs consensus and 2Q19 results for CHRW’s Global Forwarding segment and EXPD:

CHRW and EXPD shares are both up ~10% since CHRW first reported 2Q20 results. It is also important to note these stock moves were after both names had already materially exceeded pre-COVID levels of February 2020.

• The charts below highlight the directional correlation for y/y % change in both gross and net revenue for CHRW’s Global Forwarding segment, EXPD and RLGT over the past 3+ years.

The chart below details the sequential % change in quarterly gross revenue for CHRW’s Global Forwarding segment, EXPD and RLGT. The correlation over this time period between RLGT and CHRW is ~81% and ~76% for RLGT and EXPD.

• CHRW and EXPD both saw ~35% q/q increase in gross revenue in 2Q20, while net revenues increased ~25% q/q as net revenue margins compressed. Assuming similar q/q increases for RLGT implies $235M of gross revenue and ~$60M of net revenue with net revenue margins declining ~200 bps (in line with the compression seen by CHRW and EXPD). Current consensus for 2Q20 net revenues is ~$45M vs likely number approaching ~$60M.

Below is a pro-forma PnL for June results for RLGT. The only expense item that should increase q/q is agent commissions given the higher net revenue generated. We assume all other opex line items remain constant relative to actual March quarter results. This is likely conservative given RLGT likely cut costs at the outset of the pandemic given uncertain outlook.

This analysis indicates potential 2Q20 EBITDA of $10M-$11M vs current consensus of ~$2M.

• To paint the picture another way let’s focus on air freight rates. The chart below is from a Stifel note showing the y/y % increase in air freight rates vs EXPD gross and net revenue/ton. Air freight rates reached levels that were magnitudes higher than previous highs given the global capacity shortage and absolute necessity of moving PP&E and other vital medical supplies.

One of our industry contacts indicated that forwarders were booking charter flights for >$100K profit per flight during the peak of pandemic (March-May). The snippet below is directly from RLGT’s website citing its COVID response (link: https://resources.radiantdelivers.com/coronavirus-update) and mentions coordinating over two dozen charter flights thus far.

Assuming 25 charters @ $100K profit/charter implies $2.5M in EBIT contribution for 2Q20. Current consensus is for a ($1M) EBIT loss for the quarter. This also doesn’t take into account the entire rest of the business that has generated on average ~$5.5M in EBIT per quarter over the past 8 quarters.

While air freight rates have receded from the peak seen in March-May, rates remain significantly higher y/y (~5.50-$5.75/kg vs ~$3.50/kg in 2019 or up 50-60%), with rates likely remaining elevated into 2021 given the slow return of passenger belly capacity since passenger air traffic is highly unlikely to normalization any time soon. This will benefit RLGT and should support higher revenue and EBIT going-forward.

• Additionally, we also think it is important to point out that pre-COVID RLGT already had exposure to the medical, healthcare and pharmaceutical industries as well as a significant working relationship with FEMA and the Department of Defense (DoD). There is no way of handicapping what the upside could be but we think that volume declines across RLGT’s other end-markets were likely at least offset with increased volumes from these relationships.

• Looking forward another catalyst that could drive upside to RLGT operating results would be the distribution of COVID vaccines. The following links detail the unprecedented challenge of timely distribution of a vaccine.

https://www.washingtonpost.com/health/2020/08/03/coronavirus-vaccine-distribution-confusion/

https://www.ttnews.com/articles/ups-fedex-gear-ship-covid-19-vaccine-when-ready

Additionally, the White House has launched Operation Warp Speed (OWS) to solve this logistical challenge (link: https://www.hhs.gov/about/news/2020/06/16/fact-sheet-explaining-operation-warp-speed.html) with the stated goal of delivering 300M does of vaccine by January 2021. The OWS is a partnership among components of the Department of Health and Human Services and the Department of Defense, engaging with private firms and other federal agencies, and coordinating among existing HHS-wide efforts to accelerate the development, manufacturing, and distribution of COVID-19 vaccines, therapeutics, and diagnostics.

Given that RLGT already has established relationships with FEMA and the DoD as well as a specialty in moving medical / healthcare / pharmaceutical shipments, we believe it is highly likely that RLGT will have some part in the COVID vaccine distribution process. That said, the real kicker here is that the above Washington Post article states that distribution of the vaccines will be “via contracts arranged by the Defense Logistics Agency” which is an organization under the United States Transportation Command (USTRANSCOM). Crowley Logistics currently manages the ~$2.3B logistics contract for the USTRANSCOM (link: https://www.ttnews.com/articles/crowley-logistics-moves-first-load-under-23-billion-dod-contract). Our research indicates that Crowley has utilized RLGT as the sub-provider for coordinating all expedited freight moves required by the USTRANSCOM since it began servicing the contract in 2018. We strongly believe the distribution of COVID vaccines and the related PP&E / vital medical diagnostics will be a significant tailwind for RLGT operating results and stock performance over the next 6-12 months.

2)    Investors finally recognize the fundamental improvement in the underlying business that CEO Bohn Crain has orchestrated over the past 4 years.

• We were not involved in the RLGT story the last time it was written up on VIC in late 2015 and can only hypothesize what went wrong from reading the comments as well as the conservations we have had with fellow investors who were involved. The following is our brief view of what led to the stock crashing from $7.50 in July 2015 to $2.50 in October 2016.

o    RLGT acquires Wheels in April 2015 (largest acquisition in its history) and investors are bulled up.

o    RLGT likely top-ticked the Wheels deal as freight environment was weak from early 2015 through early 2017.

o    This set up RLGT for a series of earnings misses throughout 2H15 and 2016 which culminated in a disastrous FY2016 earnings report (reported in September 2016) where RLGT missed badly and pulled guidance.

o    This series of events resulted in CEO Bohn Crain losing his credibility with investors and RLGT being put in the so-called penalty box for the past 4 years.

• We think Bohn learned his lesson after seeing his stock crater particularly considering he still owns >20% of the shares. He put a halt on M&A (only doing agent conversion deals) and has focused on organic growth and improving the underlying forwarding business over the past few years. This operating improvement is best highlighted by comparing key financial metrics for FY2019 vs FY2015 to show the transformation of the business.

• Bohn used the freight cycle upswing in 2018 to purge less profitable freight and improve his underlying book of business. The charts below show net revenue margins and y/y bps change in net revenue margins for CHRW’s Global Forwarding segment, EXPD and RLGT.

RLGT reported 8 consecutive quarters of y/y net revenue margin improvement with net revenue margins increasing ~350 bps from ~24% in CY2017 to ~27.5% in CY2019. Over this time period CHRW’s Global Forwarding segment saw net revenue margins remain roughly flat while EXPD saw ~125 bps of compression.

• The chart below shows quarterly adjusted EBITDA since 1Q16. Beginning in 2Q18 there is a clear step-up in the underlying EBITDA generation of the business given the efforts Bohn undertook to purge less profitable freight and replace it with higher quality business. From 2Q18-1Q20 quarterly EBITDA averaged ~$9.5M, this compares to quarterly average of ~$6.8M from 1Q16-1Q18. This represents a ~40% increase in average quarterly EBITDA.

• Despite RLGT showing significant improvement in operating results, cash flows and returns during the 2018 freight cycle upswing shares only peaked at ~$7 in May/June 2019 as its multiple peaked at ~8x forward EBITDA. We believe Bohn and RLGT didn’t get the benefit of doubt from investors given their lack of confidence in Bohn being to able to capitalize on favorable industry fundamentals following what happened in 2015-2016 time frame.

• Additionally, RLGT has never been in a better position from a balance sheet and cash flow position. The company generated ~$34M of FCF in FY2019 and while current net leverage ticked up 1.4x as of 3/31/20 this largely reflected drawing on its revolver for liquidity to combat COVID uncertainty combined with a large working cap drag which will reverse in the 6/30/20 quarter.

• On March 13, 2020 RLGT announced a new upsized revolver that doubled the size of their facility to $150M (from $75M). This was right at the most volatile period of the market meltdown from COVID and their banking group still went forward with the new deal as they recognized the transformation of the business both from an operating and balance sheet perspective.

Valuation

• We believe fair value for shares is ~$7.50-$8 right now with potential upside to $10 by year-end as RLGT delivers beats vs current expectations when it reports its F4Q20 (June quarter) results in September and then its F1Q21 (September quarter) results in November. RLGT is a show me story and these likely earnings beats should bring renewed investor attention to RLGT and hopefully open investor’s eyes to the operating transformation that Bohn has orchestrated.

It’s also important to point out that the majority of transportation names are trading significantly above pre-COVID levels and at all-time highs, while RLGT is sitting at ~$5 vs recent high of ~$7 and all-time high of ~$7.50. The comp table below shows current valuation vs domestic asset-light peers based on CY2020 and CY2021. We think there is a very good chance for relative outperformance for RLGT vs other transports going-forward.

• Intermediately, we believe this business can generate somewhere in the ballpark of ~$55M-$60M of EBITDA and ~$40M of FCF over the next 1-2 years, which incorporates positive contribution from vaccine distribution (vs FY2019 results of ~$41M of EBITDA and ~$34M of FCF). With a debt free balance sheet and ROIC potentially approaching 20% at that point, we find it hard to believe an asset-light 3PL with these metrics wouldn’t command at least a 10x multiple. Our valuation is shown below.

• Our upside case would hinge on a re-rate of RLGT shares closer inline with asset-light peers who have typically traded at a 12-13x multiple historically, which would imply a mid-teens stock price. We think this is possible as Bohn is likely to begin returning capital to shareholders aggressively given likely net cash position over next few quarters. He has indicated that he could target $5M/quarter in buybacks. If a stated capital return policy (i.e.- like LSTR) went into effect, then we could see RLGT shares command a serious multiple. Ultimately, we also believe there is the potential for RLGT to be acquired given Bohn’s significant ownership stake (>20%) and his likely desire to monetize his net worth at some point sooner rather than later (it’s been 15 years now since Bohn founded RLGT). We believe the various PE firms who own competitors Pilot Freight, AIT and Seko would be very interested in acquiring RLGT to combined it with the asset that they already own.

Conclusion

• While it seems like RLGT has been a forgotten stock for some time, we believe that is about to change over the next few months as it reports substantial upside to consensus expectations and investors more fully understand the business transformation that Bohn has delivered over the past few years. We expect to see 50-100% upside over the next 6-12 months with the potential for even greater upside pending the timing of a COVID vaccine.

Risks

• Uncertainty around timing and magnitude of economic recovery post COVID

• Bohn resumes M&A other than agent conversions

Catalyst

• CEO Bohn Crain is presenting at Cowen’s Transports Conference the week of Labor Day

• F4Q20 (June quarter) results reported 2nd week of September

• F1Q21 (September quarter) results reported 2nd week of November

• Institute formal capital return plan (buybacks)

• Distribution of COVID vaccines