RAND LOGISTICS INC RLOG
March 04, 2014 - 7:50pm EST by
UCB1868
2014 2015
Price: 6.79 EPS -$0.14 -$0.08
Shares Out. (in M): 18 P/E 0.0x 0.0x
Market Cap (in $M): 122 P/FCF 36.0x 29.0x
Net Debt (in $M): 140 EBIT 10 11
TEV ($): 293 TEV/EBIT 31.0x 26.0x

Sign up for free guest access to view investment idea with a 45 days delay.

* Idea not eligible for membership requirements

Description

RLOG was previously presented by jet551 in 2008 and genoa321 in May of last year. There have been several recent developments. The outlook for 2014 is positive. I think that the stock idea deserves a little more attention.

 

Summary: Rand Logistics, Inc. (RLOG) is a small cap value stock with a favorable risk / reward profile. There are early indications that 2014 will be a turnaround year for the company. I believe that the stock is worth $10.00 / share (approx. 45% upside). All monetary amounts are reported in U.S. dollars unless otherwise indicated.

Introduction: Rand provides bulk freight shipping services on and around the Great Lakes. Its fleet consists of 16 vessels. Rand’s main business is the shipment of commodities from Canada to the U.S. It ships products such as salt, iron ore, limestone, and coal. Its clients include large multinationals including Cargill, ADM, Georgia-Pacific, and Cliffs Natural Resources. There are very high barriers to entry in Great Lakes shipping due to the economics of the industry and laws in the U.S. and Canada.

History

            Rand was created through a series of acquisitions. The predecessor to Rand was created as a blank check company in 2004. This company was managed by an investor named Laurence Levy. The company entered the shipping business in 2006 through the acquisitions of Ontario-based Lower Lakes Towing and Grand River Navigation. The combined value of the acquisitions was C$64.1 mil. ($56.3 mil.). The deals were funded with cash, a $15 mil. offering of Series A preferred stock, and $22.5 mil. in debt. Rand acquired eight vessels in the deal. Rand has subsequently increased the size of its fleet through a series of acquisitions. It has been the only consolidator in the industry. Rand now operates sixteen vessels and is the largest operator of River Class ships on the Great Lakes.

High Barriers to Entry

            Rand’s market position is protected by laws in the U.S. and Canada. The relevant laws are the Merchant Marine Act of 1920 (Jones Act) in the U.S. and the Coasting Trade Act in Canada. Both of these laws restrict domestic shipping, known as cabotage, to vessels documented under the laws of each country. The U.S.’ Jones Act restricts the carriage of goods or passengers between U.S. ports to U.S.-owned, -built and -flagged vessels. It also requires at least 75% of the crewmembers to be U.S. citizens. Similarly, Canada’s Coasting Trade Act restricts shipments between two Canadian ports to Canadian-registered vessels. The results of these laws is to restrict Great Lakes shipping to vessels owned by and operated by American and Canadian firms.

            Laws in the U.S. and Canada have led to less competition in shipping on the Great Lakes. Due to costs, there are no ships similar to those owned by Rand being built in the U.S. or Canada. Rand specializes in what are known as River Class ships (under 650 feet in length). Rand’s management says that the cost to build a vessel in the U.S. similar to those owned by Rand would be approximately $70 million. For comparison, the cost to build a similar vessel in China might be $50 million or less. At the cost of a new U.S.-built vessel, the replacement value of Rand’s fleet is roughly $1 billion. Although this replacement value implies that Rand’s stock is severely undervalued, there is little chance that investors will value the stock on this basis. The reason for this is that replacement value is insignificant for this industry. Market participants are aware that Great Lakes shipping is a mature market with no entrants.

The high cost of U.S. shipbuilding means that no Jones Act-compliant ships are entering the Lakes. In fact, only one new, U.S.-built vessel has been deployed on the Great Lakes in the past 13 years. The economics of the industry and the Jones Act have greatly reduced the number of ships on the Great Lakes. The size of the U.S.-flagged fleet has fallen by 60% since 1980. The carrying capacity on a per trip basis has fallen by 33% since 1980. This table provides a summary:

U.S.-Flagged Great Lakes Fleet

Year

Vessels

Per Trip Capacity (short tons)

1980

140

3,051,307

1990

71

2,145,985

2000

62

2,098,799

2010

54

1,983,717

2012

55

2,035,001

Source: USDOT - Maritime Admin.

 

 

Few new vessels are entering Great Lakes shipping. The only ships that have entered the U.S. fleet are Jones Act-compliant ships that have been converted for Great Lakes shipping. This process is usually more trouble than it is worth. Most of the available Jones Act-compliant vessels are too wide for the St. Lawrence Seaway. Even if a vessel is capable of navigating the St. Lawrence locks, it must be modified to serve ports in the region. The cost to convert a vessel for Great Lakes shipping is $25 million or more. Canada’s laws do allow for foreign-built ships, but River Class ships are not economic for Canadian fleets. Canadian shippers prefer larger, ocean-going vessels. These ships are primarily involved in the international iron ore trade. There is little concern that new entrants will impact Rand’s business.

Rand has a competitive advantage as it owns both U.S- and Canadian-flagged vessels. Rand, in essence, has two separate fleets of eight vessels apiece. Its competitors have U.S. or Canadian ships, but not both. The ability to serve more routes means that Rand is more flexible than its competitors. It can sign contracts that require port-to-port shipments in both the U.S. and Canada. Shipping in the Great Lakes is complicated. Most routes are not simple back-and-forth runs. A ship may load and unload cargo at a dozen or more ports in a season. I believe that capacity is limited and that Rand has efficiency advantages over competitors.

            River Class vessels are required for many Great Lakes routes. There are approximately 15 large and 65 small ports on the Lakes. Many of the smaller ports can only serve River Class ships due to channel depth and / or technical reasons. Approximately 50-60% of Great Lakes shipping routes include one or more ports that are restricted to River Class vessels. Rand has a very strong presence in its River Class niche. Rand, in fact, has only one major competitor in each of its two markets.  

Vessels

Here is a brief look at Rand’s fleet:

Mid-Class Seaway Max (650 – 826 ft. length, 20K – 30K ton capacity)

            Canadian-flagged:   1

            U.S.-flagged:            2

River Class (620 – 650 ft. length, 17K – 22K ton capacity)

            Canadian-flagged:   4

            U.S.-flagged             5

Bulk Carriers (no self-unloading)

            Canadian-flagged:   4

 

            Rand’s vessels appear to be quite old. Several of its ships have hulls that date from the 1940s and ‘50s. Surprisingly, though, Rand’s fleet is relatively modern. The company complies with the Jones Act by maintaining old hulls but installing new parts and equipment. It can, for example, install new navigation electronics from China and still comply with the law. Despite its age, Rand’s management says that its fleet is in a good shape. Unlike many competitors, Rand avoids routes on the St. Lawrence Seaway as the salt water is very corrosive. The company also invests in significant maintenance for all of its ships in the off-season (January to March). It typically spends $12 - $15 million per year on maintenance capex.

Competition

            Rand has a few competitors in its market niche. Its main competitors are Algoma Central in Canada and American Steamship in the U.S. Here is a brief view of Rand’s competition in its primary market:

 

Self-Unloading River Class Fleet

Company

# U.S.-Flagged Vessels

# Canadian-Flagged Vessels

Rand

5

4

Algoma Central

 

3 (2 active)

American Steamship (GATX)

3

 

Great Lakes Fleet

1

 

Interlake Steamship

1

 

Source: Company presentations

                American Steamship (ASC) is a small subsidiary of publicly-traded GATX. The primary business of GATX is railcar leasing. The management of GATX, therefore, pays little time or attention to ASC. The River Class segment of ASC is especially insignificant. ASC owns 18 self-unloading vessels, but only three River Class vessels. These vessels provide some strategic use to the overall business, but not that much. ASC might exit the business completely except that its River Class vessels are old and cannot be sold. As it is, ASC’s River Class business represents roughly 3% of GATX’s total revenue. ASC is Rand’s main U.S. competitor, but it is not a particularly strong one.

Algoma Central is a public company in Canada. Algoma, like Rand, is primarily in the business of dry-bulk shipping. Algoma is, however, similar to ASC in that most of it fleet is comprised of large vessels. Its River Class business is small and restricted to Canada-flagged ships.

I believe that Rand has some competitive advantages. Since it has the largest River Class fleet, it is able to offer more services to customers. It is also able to manage its routes more efficiently. Rand’s main competitors, ASC and Algoma Central, are not expanding their market share in River Class shipping. There are even indications that one or both of them may pull out of the business entirely. Rand is has been the primary driver of M&A activities in its industry over the past decade. I think that Rand operates in an industry with a favorable supply / demand imbalance.

            The number of River Class vessels on the Great Lakes has been falling. There are currently ten U.S.-flagged vessels, down from sixteen in 1995. Capacity has fallen from approximately 35 million tons of annual capacity in 1995 to a current level of approximately 22.5 million tons. There has been a similar decline in the size of the Canadian fleet. I believe that the River Class segment of the Great Lakes shipping market is underserved.

            Rand competes with non-shippers of many types. There are, obviously, many ways to transport commodities from one place to another. The Great Lakes fleet competes with railroads, trucks, etc. Most grain, for example, is shipped by railroad. There is, however, a cost advantage to shipping commodities by boat as compared to other methods of transportation. It is, anyway, not necessarily easy to switch from one mode of transportation to another. There are chronic shortages of rail cars and truck drivers. Great Lakes shippers will continue to play an important part in the perpetually large trading of commodities between the U.S. and Canada.

   

Cargo

            Rand ships commodities on the Great Lakes. Aggregates (especially limestone and cement) account for the majority of Rand’s cargo. In the first nine months of FY14, aggregates represented 51.9% of Rand’s cargo by tonnage. Since aggregates are used in such products as asphalt and concrete, Rand is somewhat dependent on the health of the U.S. construction industry. Other key commodities for Rand include coal (12.4% of YTD FY14 tonnage), iron ore (11.0%), grain (11.1%), and salt (9.6%). Shipments of many commodities, including iron ore and limestone, plummeted during the 2008-9 recession. They have not fully recovered to normal levels, but 2013 may have been a turnaround year. The 2013 sailing season included year-over-year tonnage gains for several commodities, including aggregates (+11%), ore (+3.2%), and salt (+14%) (Source: Lake Carriers’ Association). Total 2013 U.S. tonnage on the Great Lakes increased by approximately 4.5%.

            Demand trends may be improving for some of Rand’s key commodities. Demand dropped for all of these products dropped during the recession. Rand’s business in iron ore and aggregates should improve with a rebound in the steel and construction industries. The supply / demand imbalance in limestone appears to be particularly favorable to Rand. The BB&T analyst on this stock argues that, since the late-1990s, U.S. River Class capacity for limestone has fallen much faster than Great Lakes limestone carriage. Specifically, the number of U.S. River Class ships has fallen by more than 35% since 1995. Rand should be able to improve its profitability by running its fleet more efficiently and capturing high margin backhaul business.

Management

            Rand has an odd management structure. Unlike the majority of public companies, it does not have a named CEO. Laurence Levy vacated the CEO title in 2013 and now serves as Executive Chairman. Edward Levy (no relation) serves as President. Laurence Levy and Edward Levy are investors, not shippers. Rand is just one of the investments for which they are responsible. Captain Scott Bravener manages the shipping operations. He serves as President of Lower Lakes, Rand’s subsidiary. He has more than thirty years’ experience in Great Lakes shipping and is a former captain of one of Rand’s vessels. It is fair to say, though, that Rand could use more management with shipping experience. The company has recently made some progress on this issue.  

            Rand has recently strengthened its Board. Mike Lundin, Director since 2008, was named Lead Independent Director in 2013. He has Great Lakes shipping experience. John Binion joined the Board in 2013. He has extensive experience with Jones Act shippers. Specifically, he has been an operations executive for several inland barge companies. He is also the cousin of the COO / President of Kirby Corporation, an inland tank barge operator. Kirby is widely considered to be one of the best-managed firms in the Jones Act shipping business. I view the recent management changes as signs that Rand is serious about improving its operations.

            Rand has upgraded its operations and engineering staff. Rand suffered some major mechanical failures in the 2012 sailing year. In response, the company hired Bob Bezan as VP of Planning and Analysis in the spring of 2013. Bezan had previously spent fourteen years in similar capacities with Algoma Central and Seaway Marine Transport. Rand has, in fact, rebuilt and expanded its engineering team. It has also implemented an incentive program to minimize operating incidents. The changes appear to be working. Rand has experienced 33% fewer mechanical delays and 85% fewer incident delays in FY14 than in FY13.    

            Rand’s corporate governance practices have received some criticism from shareholders. The first thing to note is that the executive offices of Rand are, oddly enough, not located near any of the Great Lakes. They are, instead, located on 5th Avenue in Manhattan. Rand boasts this unnecessarily prestigious address because it shares the offices of, and pays rent to, Hyde Park Holdings. Hyde Park is the investment firm of Laurence Levy and Ed Levy. As previously mentioned, Levy and Levy are not full-time executives of Rand. They are, nonetheless, generously compensated. One could even argue that their compensation is exorbitant. In FY12, for example, Laurence Levy’s total compensation exceeded $850,000. Rand’s management has shown some willingness to listen to shareholders’ concerns. The company did, at least, reduce compensation and bonuses after a poor FY13.

Labor

            Rand has lower labor costs than competitors. Rand’s U.S. fleet is unionized by the International Organization of Masters, Mates, & Pilots (MM&P). Rand appears to have a good relationship with this union. Rand, unlike its competitors, is able to crew its ships at the Coast Guard-mandated minimum. Despite some organizing efforts, Rand’s Canadian fleet is not unionized. Rand’s main competitors appear to have less favorable labor relations. Rand believes that its favorable labor situation provides a cost advantage of approximately $500K versus its competitors. The entire industry does face a long-term shortage of skilled labor. Since Great Lakes seamen face difficult work and months away from home, few young people are attracted to the profession. Rand, fortunately, has lower labor needs than other operators of larger ships.

The Perfect Storm: 2012

            Rand is trying to get past difficulties in the 2012 sailing season. Business, first of all, was slow in 2012. Even worse, several unusual events significantly reduced Rand’s sailing days in the year. Like all Great Lakes shippers, Rand’s operations were impacted by Hurricane Sandy. The company lost 30 sailing days due to the storm. More significantly, the company had two vessels that lost days due to mechanical issues and a new vessel that entered into service three months behind schedule. The problems caused several million dollars in unexpected expenses and lost business. There were also several macro factors that impacted the industry. The result was that Rand reported operating income for FY13 of $8.1 mil., down from $15.2 mil. in FY12. The stock price fell from about $9 in mid-2012 to about $6 by the end of the year. In response to the problems, Rand made a number of positive changes. Among these changes were upgrades to its engineering and vessel service staff. Rand has recently introduced an incentive structure that is tied to reducing lost sailing days. The actions seem to have worked as Rand’s performance improved in the 2013 sailing season.

Clearer Skies: 2013 Sailing Season

            Rand’s operations have improved in FY14. As previously mentioned, mechanical delays fell 33% from the first nine months of the previous year. Moreover, fleet utilization improved by 6.6 percentage points and sailing days increased by an average of 18 days per vessel in this period. Due to these improvements, vessel operating costs declined by 7.8% ($2,087 per sailing day) and total tonnage increased by 6.7%. Unfortunately, though, commodity mix was not favorable and business was generally slow. Total revenue and operating income were similar to the previous year. The improvements should, however, allow the company to operate more efficiently in FY15.

2014 Sailing Season Outlook

Rand ends the 2013 sailing season on a high note. After a slow start, Rand saw an uptick in demand in the latter half of the season. Its vessel margin per day should be close to $12,000 for FY14. Vessel margin per day was only $10,700 for FY13. The company was able to operate most of its fleet into December. Due to weather, the Great Lakes shipping business basically shuts down in the first calendar quarter of the year. Rand uses this time to make repairs and dry dock some of its vessels. The related expenses are estimated at a very typical $13 million for FY14.

            Rand has issued a positive outlook for the 2014 sailing season (FY2015). On December 23, 2013, Rand issued a press release announcing new long-term contractual business. The new business is expected to add more than 250 sailing days. From the press release: “These contracts, a combination of new business, market share gains and organic market growth, are expected to rebalance the Company’s 2014 sailing season commodity mix to levels more consistent with prior years and improve existing fleet operating efficiencies.” I have been told that the new contracts include shipments of iron ore from Marquette, MI to Toledo, OH for Cliffs Natural Resources. Cliffs won a contract to supply iron ore to Cleveland Steel. The new contracts also include shipments of coal out of Sandusky, OH, meaning that Rand will get paid in both directions.

The new contracts should allow Rand better utilize its vessels in FY2015 and beyond. Most of Rand’s contracts are multi-year deals. The new contracts should improve pricing and margins over the next few years. The profitability increases derive from improved commodity mix and vessel utilization. Rand has achieved 95% vessel utilization in FY14, including 99.3% in Q3. One of Rand’s vessels, the McKee Sons, was dry docked in FY14 due to low demand. This ship could go back into service as some point. It appears, however, that it has not yet undergone the necessary Coast Guard inspections. There is also the possibility that Rand could acquire a new ship, although no expansion appears to be imminent. The fact that Rand chose to send a press release about FY15 contracts indicates that these deals are significant and accretive to earnings.

Weather

            Rand’s business is affected by weather conditions on the Great Lakes. Shipping is, of course, an outdoors business that can be slowed or stopped by bad weather and ice floes. Shipping on the Great Lakes basically shuts down in the first calendar quarter of the year. There can be disruptions in other parts of the year as well. In November, 2013, for example, Great Lakes shipping was slowed by ice floes. Rand attempts to keep some of its ships on the water into late-December or early-January. It might seem obvious that Great Lakes shippers would prefer warm weather over cold, but this is not necessarily the case. A harsh winter can actually bring surprising benefits to Great Lakes shippers.

            Weather in the Great Lakes’ region affects water levels of the lakes. Water levels rise when the weather is cold and there is significant rain and snow. They fall when precipitation is low or when higher temperatures cause evaporation. Great Lakes’ water levels affect shipping because ships can carry more cargo when water levels are high. Conversely, when water levels are low, vessels must carry less cargo or risk running aground in shallow channels. The Great Lakes’ water levels have been very low in recent years. In 2012, Lakes Michigan and Huron reached their lowest water levels ever recorded. The decline in water levels may be part of the long-term warming trend. One government scientist estimated that ice floes on the Great Lakes have declined by 71% over the past 40 years (source: NOAA). Water levels have been generally low since the late-‘90s. There is a possibility, however, that water levels may be improved in 2014.

            The extreme cold and snow in the Midwest in early-2014 may actually be good for Rand’s business. Highlighted by the “polar vortex” in early-January, 2014, the Midwest has experienced a brutal winter. The region has experienced record-low temperatures and heavy snow. More than 90% of the Great Lakes were covered in ice by early-March. It is likely that this weather pattern will bring higher water levels for the 2014 sailing season. If that occurs, then Rand might be able to load more cargo on its ships. Rand can, obviously, increase its revenue by increasing the size of its loads. It can also run its fleet more efficiently when its ships are full. Another benefit of a cold winter is the possibility of an increase in the supply of one of Rand’s key commodities.

An increase in precipitation in the Great Lakes region could be beneficial to Rand’s salt shipping business. This business was relatively slow in the 2013 season. One factor was the shutdown of a Cargill salt mine. The mine, which is located 1,800 fee beneath Lake Erie, was closed in August for seismic-related safety reasons. It has since been reopened. Rand’s salt shipping business was also affected by a lack of precipitation in the region. Salt mines are more productive when there is a lot of precipitation. A final factor in Great Lakes salt business is the demand for salt. Most of the salt from the Great Lakes region is used for road de-icing. It is likely, therefore, that the heavy snow in the winter of 2013-14 will increase demand for salt. There are already indications that this is happening.

Salt Shortages

            The heavy snowfall in the Midwest in early-2014 is causing shortages of road salt throughout the region. There have been many news reports about the issue. A February 1, 2014, Chicago Tribune article, for example, discusses the severity of the problem. The article explains that many Illinois cities have begun to ration salt to conserve dwindling supplies. The extreme snowfall levels caught them by surprise. Naperville, for example, had used 16,000 tons of salt by the end of January, 2014. The amount represented an increase of 11,700 tons over the prior year. Similar situations have been reported in other Midwestern cities and states. On February 4, 2014, for example, an article in the Twinsburg (Ohio) Bulletin reported that, “Demand is so high that salt gets more expensive every day.” The article suggested that 2014 salt prices could quadruple over 2013 rates. A separate article mentioned that the State of Indiana exceeded its annual salt budget by mid-January. Both Morton Salt and Compass Minerals, the largest North American de-icing salt supplier, use Rand to ship salt. The company should profit from high salt prices and demand.

Preferred Stock

            Rand is trying to recapitalize to reduce expenses. The company issued $14.9 mil. in Series A preferred stock in 2005. The preferred stock pays an annual cash dividend of 7.75% that increases biannually by 50 basis points if dividends are in arrears. The maximum dividend rate is 12%. Rand has accrued, but not paid, preferred stock dividends since January 1, 2007, so the dividend presently accrues at 12%. The preferred converts to common at $6.20 / share, but is not currently convertible. It becomes convertible if Rand’s stock exceeds $8.50 / share for 20 out of 30 days. Rand ended Q3 with an accrued preferred dividend of $16.1 million, so the total balance of the preferred is approximately $31 million and rising. The preferred financing is, clearly, a major expense for the company. Rand’s management is in discussions with major shareholder David Knott to reduce the cost of the preferred stock. I believe that any recapitalization would be a major positive for the company.

Investor Relations

            Rand is making more of an effort to communicate with investors. Rand is a little-known company with minimal Street coverage. The stock trades fewer than 40K shares per day. Recently, though, Rand’s management has made more of an effort to promote the stock. Management gave presentations at two investment conferences in Florida in February of 2014. Slides and webcasts from these presentations are available on the company’s website. Rand also produces a useful slide presentation for every earnings conference call.

http://www.randlogisticsinc.com/presentations.html

 Financials

Here are some of the key statistics for Rand:

Stock price (3/4/14): $6.79

# Shares outstanding: 17.9 mil.

Mkt. cap.: $122 mil.

Net debt: $140 mil.

Preferred Stock + accrued dividend: $31 mil.

TEV: $293 mil.

BV per share: $4.11

Revenue (1st 9 mos. FY14): $148.8 mil.

Revenue (TTM): $155.7 mil.

EBITDA (TTM): $27.4 mil.

EBIT (1st 9 mos. FY14): $24.4 mil.

Operating income + depreciation & amortization (1st 9 mos. FY14): $40.7 mil.

EPS (1st 9 mos. FY14): $0.16

EPS excl. preferred stock dividends (1st 9 mos. FY14): $0.31

Analysts’ Estimates

            The only two sell-side firms that issue reports on Rand are BB&T Capital Markets (Richmond, VA) and CJS Securities (White Plains, NY). Here are the analysts’ estimates (in $millions):

                                             FY13A           FY14E            FY15E

Total Revenue                     156.6             154.6             157.0

     Freight and related        117.8              125.5             131.4

     Fuel & Surcharges           37.4               26.6               25.4

EBITDA                                  28.3              31.2               33.1

EBIT                                        8.1              9.5                  11.2

Rand has 17.9 million (fully-diluted) shares outstanding, so the market cap is approximately $122 million. The value of the preferred stock plus the accrued dividends is $31 million. The company has $140 mil. in net debt, so the enterprise value is approximately $293 million. Based on this number, RLOG is trading at the following multiples:

                                            FY13A          FY14E            FY15E

TEV / Revenue                     1.9x              1.9x                1.9x

TEV / EBITDA                       10.4x             9.4x                8.9x

TEV / EBIT                             36.2x           30.8x             26.2x

Rand has historically traded at EBITDA multiples of 8x – 13x, so it is currently at the low end of this range. I believe that the analysts’ estimates and price targets are conservative. The price targets of the two analysts are $8.00 (BB&T) and $8.50 (CJS). The average price target was $10.50 as recently as May, 2013. Although both analysts rate the stock as a “Buy”, I think that they are being careful about raising their estimates until the 2014 sailing season gets underway.

Valuation

There are a couple of different ways to value RLOG. The BB&T analyst estimates the company’s NAV at $7.15 per share. If true, then RLOG is trading at only 0.9x NAV. Most analysts will value RLOG on an EV / EBITDA basis. As stated above, analysts expect EBITDA of approximately $31 mil. FY14 and $33 mil. in FY15. If RLOG trades at 9.5x FY15 EBITDA, the stock would be valued at $7.96 / share. I think, however, that there is upside to the FY15 EBITDA estimates. These estimates were little changed after the recent announcement of new contracts. They also assume relatively low utilization estimates. I calculate an EBITDA of approximately $38.0 mil. using these assumptions:

# Vessels: 15

Max. sailing days / vessel: 250

Utilization: 95%

Adj. margin / day: $12,400

The stock is valued at $10.61 / share at a 9.5x multiple on $38.0 million. My estimates may be too high, so I am going to use a $10.00 price target. It is important to note that Rand’s business has been relatively weak since the 2008-9 recession. I believe that Rand could exceed $40 million in EBITDA in a stronger market. The company could, for example, put its dry docked ship back into service.

Recent Deal

            A recent acquisition in the shipping industry provides a benchmark for a valuation of Rand. In November, 2012, International Shipholding completed the acquisition of Jones Act shipper U.S. United Ocean Services (UOS). In the deal, International Shipholding paid $111 million in cash for two handysize bulkers and four tug / barge units. International Shipholding paid approximately 10x EBITDA for UOS, but the cost was actually higher. I understand that the acquired vessels were delivered in poor shape and required $30 - $40 million in immediate capex. This means that International Shipholding may have actually paid 12-13x EBITDA for UOS. The recent acquisition of UOS implies that Rand could trade at 10x EBITDA or higher.

Conclusion: Rand Logistics (RLOG) is a small company with a big moat. The company has suffered through a few difficult years due to non-recurring problems and macro issues. It appears, however, that the 2014 sailing season will be a strong one for the company. I think that it is a good value stock idea in a market with few value stocks. I think that the stock has 45+% possible upside.

 

 

 

                 

                                   

 

           

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

re-capitalization / elimination of preferred stock, declining competition, rebound in construction industry, winter of '14
 
    sort by    

    Description

    RLOG was previously presented by jet551 in 2008 and genoa321 in May of last year. There have been several recent developments. The outlook for 2014 is positive. I think that the stock idea deserves a little more attention.

     

    Summary: Rand Logistics, Inc. (RLOG) is a small cap value stock with a favorable risk / reward profile. There are early indications that 2014 will be a turnaround year for the company. I believe that the stock is worth $10.00 / share (approx. 45% upside). All monetary amounts are reported in U.S. dollars unless otherwise indicated.

    Introduction: Rand provides bulk freight shipping services on and around the Great Lakes. Its fleet consists of 16 vessels. Rand’s main business is the shipment of commodities from Canada to the U.S. It ships products such as salt, iron ore, limestone, and coal. Its clients include large multinationals including Cargill, ADM, Georgia-Pacific, and Cliffs Natural Resources. There are very high barriers to entry in Great Lakes shipping due to the economics of the industry and laws in the U.S. and Canada.

    History

                Rand was created through a series of acquisitions. The predecessor to Rand was created as a blank check company in 2004. This company was managed by an investor named Laurence Levy. The company entered the shipping business in 2006 through the acquisitions of Ontario-based Lower Lakes Towing and Grand River Navigation. The combined value of the acquisitions was C$64.1 mil. ($56.3 mil.). The deals were funded with cash, a $15 mil. offering of Series A preferred stock, and $22.5 mil. in debt. Rand acquired eight vessels in the deal. Rand has subsequently increased the size of its fleet through a series of acquisitions. It has been the only consolidator in the industry. Rand now operates sixteen vessels and is the largest operator of River Class ships on the Great Lakes.

    High Barriers to Entry

                Rand’s market position is protected by laws in the U.S. and Canada. The relevant laws are the Merchant Marine Act of 1920 (Jones Act) in the U.S. and the Coasting Trade Act in Canada. Both of these laws restrict domestic shipping, known as cabotage, to vessels documented under the laws of each country. The U.S.’ Jones Act restricts the carriage of goods or passengers between U.S. ports to U.S.-owned, -built and -flagged vessels. It also requires at least 75% of the crewmembers to be U.S. citizens. Similarly, Canada’s Coasting Trade Act restricts shipments between two Canadian ports to Canadian-registered vessels. The results of these laws is to restrict Great Lakes shipping to vessels owned by and operated by American and Canadian firms.

                Laws in the U.S. and Canada have led to less competition in shipping on the Great Lakes. Due to costs, there are no ships similar to those owned by Rand being built in the U.S. or Canada. Rand specializes in what are known as River Class ships (under 650 feet in length). Rand’s management says that the cost to build a vessel in the U.S. similar to those owned by Rand would be approximately $70 million. For comparison, the cost to build a similar vessel in China might be $50 million or less. At the cost of a new U.S.-built vessel, the replacement value of Rand’s fleet is roughly $1 billion. Although this replacement value implies that Rand’s stock is severely undervalued, there is little chance that investors will value the stock on this basis. The reason for this is that replacement value is insignificant for this industry. Market participants are aware that Great Lakes shipping is a mature market with no entrants.

    The high cost of U.S. shipbuilding means that no Jones Act-compliant ships are entering the Lakes. In fact, only one new, U.S.-built vessel has been deployed on the Great Lakes in the past 13 years. The economics of the industry and the Jones Act have greatly reduced the number of ships on the Great Lakes. The size of the U.S.-flagged fleet has fallen by 60% since 1980. The carrying capacity on a per trip basis has fallen by 33% since 1980. This table provides a summary:

    U.S.-Flagged Great Lakes Fleet

    Year

    Vessels

    Per Trip Capacity (short tons)

    1980

    140

    3,051,307

    1990

    71

    2,145,985

    2000

    62

    2,098,799

    2010

    54

    1,983,717

    2012

    55

    2,035,001

    Source: USDOT - Maritime Admin.

     

     

    Few new vessels are entering Great Lakes shipping. The only ships that have entered the U.S. fleet are Jones Act-compliant ships that have been converted for Great Lakes shipping. This process is usually more trouble than it is worth. Most of the available Jones Act-compliant vessels are too wide for the St. Lawrence Seaway. Even if a vessel is capable of navigating the St. Lawrence locks, it must be modified to serve ports in the region. The cost to convert a vessel for Great Lakes shipping is $25 million or more. Canada’s laws do allow for foreign-built ships, but River Class ships are not economic for Canadian fleets. Canadian shippers prefer larger, ocean-going vessels. These ships are primarily involved in the international iron ore trade. There is little concern that new entrants will impact Rand’s business.

    Rand has a competitive advantage as it owns both U.S- and Canadian-flagged vessels. Rand, in essence, has two separate fleets of eight vessels apiece. Its competitors have U.S. or Canadian ships, but not both. The ability to serve more routes means that Rand is more flexible than its competitors. It can sign contracts that require port-to-port shipments in both the U.S. and Canada. Shipping in the Great Lakes is complicated. Most routes are not simple back-and-forth runs. A ship may load and unload cargo at a dozen or more ports in a season. I believe that capacity is limited and that Rand has efficiency advantages over competitors.

                River Class vessels are required for many Great Lakes routes. There are approximately 15 large and 65 small ports on the Lakes. Many of the smaller ports can only serve River Class ships due to channel depth and / or technical reasons. Approximately 50-60% of Great Lakes shipping routes include one or more ports that are restricted to River Class vessels. Rand has a very strong presence in its River Class niche. Rand, in fact, has only one major competitor in each of its two markets.  

    Vessels

    Here is a brief look at Rand’s fleet:

    Mid-Class Seaway Max (650 – 826 ft. length, 20K – 30K ton capacity)

                Canadian-flagged:   1

                U.S.-flagged:            2

    River Class (620 – 650 ft. length, 17K – 22K ton capacity)

                Canadian-flagged:   4

                U.S.-flagged             5

    Bulk Carriers (no self-unloading)

                Canadian-flagged:   4

     

                Rand’s vessels appear to be quite old. Several of its ships have hulls that date from the 1940s and ‘50s. Surprisingly, though, Rand’s fleet is relatively modern. The company complies with the Jones Act by maintaining old hulls but installing new parts and equipment. It can, for example, install new navigation electronics from China and still comply with the law. Despite its age, Rand’s management says that its fleet is in a good shape. Unlike many competitors, Rand avoids routes on the St. Lawrence Seaway as the salt water is very corrosive. The company also invests in significant maintenance for all of its ships in the off-season (January to March). It typically spends $12 - $15 million per year on maintenance capex.

    Competition

                Rand has a few competitors in its market niche. Its main competitors are Algoma Central in Canada and American Steamship in the U.S. Here is a brief view of Rand’s competition in its primary market:

     

    Self-Unloading River Class Fleet

    Company

    # U.S.-Flagged Vessels

    # Canadian-Flagged Vessels

    Rand

    5

    4

    Algoma Central

     

    3 (2 active)

    American Steamship (GATX)

    3

     

    Great Lakes Fleet

    1

     

    Interlake Steamship

    1

     

    Source: Company presentations

                    American Steamship (ASC) is a small subsidiary of publicly-traded GATX. The primary business of GATX is railcar leasing. The management of GATX, therefore, pays little time or attention to ASC. The River Class segment of ASC is especially insignificant. ASC owns 18 self-unloading vessels, but only three River Class vessels. These vessels provide some strategic use to the overall business, but not that much. ASC might exit the business completely except that its River Class vessels are old and cannot be sold. As it is, ASC’s River Class business represents roughly 3% of GATX’s total revenue. ASC is Rand’s main U.S. competitor, but it is not a particularly strong one.

    Algoma Central is a public company in Canada. Algoma, like Rand, is primarily in the business of dry-bulk shipping. Algoma is, however, similar to ASC in that most of it fleet is comprised of large vessels. Its River Class business is small and restricted to Canada-flagged ships.

    I believe that Rand has some competitive advantages. Since it has the largest River Class fleet, it is able to offer more services to customers. It is also able to manage its routes more efficiently. Rand’s main competitors, ASC and Algoma Central, are not expanding their market share in River Class shipping. There are even indications that one or both of them may pull out of the business entirely. Rand is has been the primary driver of M&A activities in its industry over the past decade. I think that Rand operates in an industry with a favorable supply / demand imbalance.

                The number of River Class vessels on the Great Lakes has been falling. There are currently ten U.S.-flagged vessels, down from sixteen in 1995. Capacity has fallen from approximately 35 million tons of annual capacity in 1995 to a current level of approximately 22.5 million tons. There has been a similar decline in the size of the Canadian fleet. I believe that the River Class segment of the Great Lakes shipping market is underserved.

                Rand competes with non-shippers of many types. There are, obviously, many ways to transport commodities from one place to another. The Great Lakes fleet competes with railroads, trucks, etc. Most grain, for example, is shipped by railroad. There is, however, a cost advantage to shipping commodities by boat as compared to other methods of transportation. It is, anyway, not necessarily easy to switch from one mode of transportation to another. There are chronic shortages of rail cars and truck drivers. Great Lakes shippers will continue to play an important part in the perpetually large trading of commodities between the U.S. and Canada.

       

    Cargo

                Rand ships commodities on the Great Lakes. Aggregates (especially limestone and cement) account for the majority of Rand’s cargo. In the first nine months of FY14, aggregates represented 51.9% of Rand’s cargo by tonnage. Since aggregates are used in such products as asphalt and concrete, Rand is somewhat dependent on the health of the U.S. construction industry. Other key commodities for Rand include coal (12.4% of YTD FY14 tonnage), iron ore (11.0%), grain (11.1%), and salt (9.6%). Shipments of many commodities, including iron ore and limestone, plummeted during the 2008-9 recession. They have not fully recovered to normal levels, but 2013 may have been a turnaround year. The 2013 sailing season included year-over-year tonnage gains for several commodities, including aggregates (+11%), ore (+3.2%), and salt (+14%) (Source: Lake Carriers’ Association). Total 2013 U.S. tonnage on the Great Lakes increased by approximately 4.5%.

                Demand trends may be improving for some of Rand’s key commodities. Demand dropped for all of these products dropped during the recession. Rand’s business in iron ore and aggregates should improve with a rebound in the steel and construction industries. The supply / demand imbalance in limestone appears to be particularly favorable to Rand. The BB&T analyst on this stock argues that, since the late-1990s, U.S. River Class capacity for limestone has fallen much faster than Great Lakes limestone carriage. Specifically, the number of U.S. River Class ships has fallen by more than 35% since 1995. Rand should be able to improve its profitability by running its fleet more efficiently and capturing high margin backhaul business.

    Management

                Rand has an odd management structure. Unlike the majority of public companies, it does not have a named CEO. Laurence Levy vacated the CEO title in 2013 and now serves as Executive Chairman. Edward Levy (no relation) serves as President. Laurence Levy and Edward Levy are investors, not shippers. Rand is just one of the investments for which they are responsible. Captain Scott Bravener manages the shipping operations. He serves as President of Lower Lakes, Rand’s subsidiary. He has more than thirty years’ experience in Great Lakes shipping and is a former captain of one of Rand’s vessels. It is fair to say, though, that Rand could use more management with shipping experience. The company has recently made some progress on this issue.  

                Rand has recently strengthened its Board. Mike Lundin, Director since 2008, was named Lead Independent Director in 2013. He has Great Lakes shipping experience. John Binion joined the Board in 2013. He has extensive experience with Jones Act shippers. Specifically, he has been an operations executive for several inland barge companies. He is also the cousin of the COO / President of Kirby Corporation, an inland tank barge operator. Kirby is widely considered to be one of the best-managed firms in the Jones Act shipping business. I view the recent management changes as signs that Rand is serious about improving its operations.

                Rand has upgraded its operations and engineering staff. Rand suffered some major mechanical failures in the 2012 sailing year. In response, the company hired Bob Bezan as VP of Planning and Analysis in the spring of 2013. Bezan had previously spent fourteen years in similar capacities with Algoma Central and Seaway Marine Transport. Rand has, in fact, rebuilt and expanded its engineering team. It has also implemented an incentive program to minimize operating incidents. The changes appear to be working. Rand has experienced 33% fewer mechanical delays and 85% fewer incident delays in FY14 than in FY13.    

                Rand’s corporate governance practices have received some criticism from shareholders. The first thing to note is that the executive offices of Rand are, oddly enough, not located near any of the Great Lakes. They are, instead, located on 5th Avenue in Manhattan. Rand boasts this unnecessarily prestigious address because it shares the offices of, and pays rent to, Hyde Park Holdings. Hyde Park is the investment firm of Laurence Levy and Ed Levy. As previously mentioned, Levy and Levy are not full-time executives of Rand. They are, nonetheless, generously compensated. One could even argue that their compensation is exorbitant. In FY12, for example, Laurence Levy’s total compensation exceeded $850,000. Rand’s management has shown some willingness to listen to shareholders’ concerns. The company did, at least, reduce compensation and bonuses after a poor FY13.

    Labor

                Rand has lower labor costs than competitors. Rand’s U.S. fleet is unionized by the International Organization of Masters, Mates, & Pilots (MM&P). Rand appears to have a good relationship with this union. Rand, unlike its competitors, is able to crew its ships at the Coast Guard-mandated minimum. Despite some organizing efforts, Rand’s Canadian fleet is not unionized. Rand’s main competitors appear to have less favorable labor relations. Rand believes that its favorable labor situation provides a cost advantage of approximately $500K versus its competitors. The entire industry does face a long-term shortage of skilled labor. Since Great Lakes seamen face difficult work and months away from home, few young people are attracted to the profession. Rand, fortunately, has lower labor needs than other operators of larger ships.

    The Perfect Storm: 2012

                Rand is trying to get past difficulties in the 2012 sailing season. Business, first of all, was slow in 2012. Even worse, several unusual events significantly reduced Rand’s sailing days in the year. Like all Great Lakes shippers, Rand’s operations were impacted by Hurricane Sandy. The company lost 30 sailing days due to the storm. More significantly, the company had two vessels that lost days due to mechanical issues and a new vessel that entered into service three months behind schedule. The problems caused several million dollars in unexpected expenses and lost business. There were also several macro factors that impacted the industry. The result was that Rand reported operating income for FY13 of $8.1 mil., down from $15.2 mil. in FY12. The stock price fell from about $9 in mid-2012 to about $6 by the end of the year. In response to the problems, Rand made a number of positive changes. Among these changes were upgrades to its engineering and vessel service staff. Rand has recently introduced an incentive structure that is tied to reducing lost sailing days. The actions seem to have worked as Rand’s performance improved in the 2013 sailing season.

    Clearer Skies: 2013 Sailing Season

                Rand’s operations have improved in FY14. As previously mentioned, mechanical delays fell 33% from the first nine months of the previous year. Moreover, fleet utilization improved by 6.6 percentage points and sailing days increased by an average of 18 days per vessel in this period. Due to these improvements, vessel operating costs declined by 7.8% ($2,087 per sailing day) and total tonnage increased by 6.7%. Unfortunately, though, commodity mix was not favorable and business was generally slow. Total revenue and operating income were similar to the previous year. The improvements should, however, allow the company to operate more efficiently in FY15.

    2014 Sailing Season Outlook

    Rand ends the 2013 sailing season on a high note. After a slow start, Rand saw an uptick in demand in the latter half of the season. Its vessel margin per day should be close to $12,000 for FY14. Vessel margin per day was only $10,700 for FY13. The company was able to operate most of its fleet into December. Due to weather, the Great Lakes shipping business basically shuts down in the first calendar quarter of the year. Rand uses this time to make repairs and dry dock some of its vessels. The related expenses are estimated at a very typical $13 million for FY14.

                Rand has issued a positive outlook for the 2014 sailing season (FY2015). On December 23, 2013, Rand issued a press release announcing new long-term contractual business. The new business is expected to add more than 250 sailing days. From the press release: “These contracts, a combination of new business, market share gains and organic market growth, are expected to rebalance the Company’s 2014 sailing season commodity mix to levels more consistent with prior years and improve existing fleet operating efficiencies.” I have been told that the new contracts include shipments of iron ore from Marquette, MI to Toledo, OH for Cliffs Natural Resources. Cliffs won a contract to supply iron ore to Cleveland Steel. The new contracts also include shipments of coal out of Sandusky, OH, meaning that Rand will get paid in both directions.

    The new contracts should allow Rand better utilize its vessels in FY2015 and beyond. Most of Rand’s contracts are multi-year deals. The new contracts should improve pricing and margins over the next few years. The profitability increases derive from improved commodity mix and vessel utilization. Rand has achieved 95% vessel utilization in FY14, including 99.3% in Q3. One of Rand’s vessels, the McKee Sons, was dry docked in FY14 due to low demand. This ship could go back into service as some point. It appears, however, that it has not yet undergone the necessary Coast Guard inspections. There is also the possibility that Rand could acquire a new ship, although no expansion appears to be imminent. The fact that Rand chose to send a press release about FY15 contracts indicates that these deals are significant and accretive to earnings.

    Weather

                Rand’s business is affected by weather conditions on the Great Lakes. Shipping is, of course, an outdoors business that can be slowed or stopped by bad weather and ice floes. Shipping on the Great Lakes basically shuts down in the first calendar quarter of the year. There can be disruptions in other parts of the year as well. In November, 2013, for example, Great Lakes shipping was slowed by ice floes. Rand attempts to keep some of its ships on the water into late-December or early-January. It might seem obvious that Great Lakes shippers would prefer warm weather over cold, but this is not necessarily the case. A harsh winter can actually bring surprising benefits to Great Lakes shippers.

                Weather in the Great Lakes’ region affects water levels of the lakes. Water levels rise when the weather is cold and there is significant rain and snow. They fall when precipitation is low or when higher temperatures cause evaporation. Great Lakes’ water levels affect shipping because ships can carry more cargo when water levels are high. Conversely, when water levels are low, vessels must carry less cargo or risk running aground in shallow channels. The Great Lakes’ water levels have been very low in recent years. In 2012, Lakes Michigan and Huron reached their lowest water levels ever recorded. The decline in water levels may be part of the long-term warming trend. One government scientist estimated that ice floes on the Great Lakes have declined by 71% over the past 40 years (source: NOAA). Water levels have been generally low since the late-‘90s. There is a possibility, however, that water levels may be improved in 2014.

                The extreme cold and snow in the Midwest in early-2014 may actually be good for Rand’s business. Highlighted by the “polar vortex” in early-January, 2014, the Midwest has experienced a brutal winter. The region has experienced record-low temperatures and heavy snow. More than 90% of the Great Lakes were covered in ice by early-March. It is likely that this weather pattern will bring higher water levels for the 2014 sailing season. If that occurs, then Rand might be able to load more cargo on its ships. Rand can, obviously, increase its revenue by increasing the size of its loads. It can also run its fleet more efficiently when its ships are full. Another benefit of a cold winter is the possibility of an increase in the supply of one of Rand’s key commodities.

    An increase in precipitation in the Great Lakes region could be beneficial to Rand’s salt shipping business. This business was relatively slow in the 2013 season. One factor was the shutdown of a Cargill salt mine. The mine, which is located 1,800 fee beneath Lake Erie, was closed in August for seismic-related safety reasons. It has since been reopened. Rand’s salt shipping business was also affected by a lack of precipitation in the region. Salt mines are more productive when there is a lot of precipitation. A final factor in Great Lakes salt business is the demand for salt. Most of the salt from the Great Lakes region is used for road de-icing. It is likely, therefore, that the heavy snow in the winter of 2013-14 will increase demand for salt. There are already indications that this is happening.

    Salt Shortages

                The heavy snowfall in the Midwest in early-2014 is causing shortages of road salt throughout the region. There have been many news reports about the issue. A February 1, 2014, Chicago Tribune article, for example, discusses the severity of the problem. The article explains that many Illinois cities have begun to ration salt to conserve dwindling supplies. The extreme snowfall levels caught them by surprise. Naperville, for example, had used 16,000 tons of salt by the end of January, 2014. The amount represented an increase of 11,700 tons over the prior year. Similar situations have been reported in other Midwestern cities and states. On February 4, 2014, for example, an article in the Twinsburg (Ohio) Bulletin reported that, “Demand is so high that salt gets more expensive every day.” The article suggested that 2014 salt prices could quadruple over 2013 rates. A separate article mentioned that the State of Indiana exceeded its annual salt budget by mid-January. Both Morton Salt and Compass Minerals, the largest North American de-icing salt supplier, use Rand to ship salt. The company should profit from high salt prices and demand.

    Preferred Stock

                Rand is trying to recapitalize to reduce expenses. The company issued $14.9 mil. in Series A preferred stock in 2005. The preferred stock pays an annual cash dividend of 7.75% that increases biannually by 50 basis points if dividends are in arrears. The maximum dividend rate is 12%. Rand has accrued, but not paid, preferred stock dividends since January 1, 2007, so the dividend presently accrues at 12%. The preferred converts to common at $6.20 / share, but is not currently convertible. It becomes convertible if Rand’s stock exceeds $8.50 / share for 20 out of 30 days. Rand ended Q3 with an accrued preferred dividend of $16.1 million, so the total balance of the preferred is approximately $31 million and rising. The preferred financing is, clearly, a major expense for the company. Rand’s management is in discussions with major shareholder David Knott to reduce the cost of the preferred stock. I believe that any recapitalization would be a major positive for the company.

    Investor Relations

                Rand is making more of an effort to communicate with investors. Rand is a little-known company with minimal Street coverage. The stock trades fewer than 40K shares per day. Recently, though, Rand’s management has made more of an effort to promote the stock. Management gave presentations at two investment conferences in Florida in February of 2014. Slides and webcasts from these presentations are available on the company’s website. Rand also produces a useful slide presentation for every earnings conference call.

    http://www.randlogisticsinc.com/presentations.html

     Financials

    Here are some of the key statistics for Rand:

    Stock price (3/4/14): $6.79

    # Shares outstanding: 17.9 mil.

    Mkt. cap.: $122 mil.

    Net debt: $140 mil.

    Preferred Stock + accrued dividend: $31 mil.

    TEV: $293 mil.

    BV per share: $4.11

    Revenue (1st 9 mos. FY14): $148.8 mil.

    Revenue (TTM): $155.7 mil.

    EBITDA (TTM): $27.4 mil.

    EBIT (1st 9 mos. FY14): $24.4 mil.

    Operating income + depreciation & amortization (1st 9 mos. FY14): $40.7 mil.

    EPS (1st 9 mos. FY14): $0.16

    EPS excl. preferred stock dividends (1st 9 mos. FY14): $0.31

    Analysts’ Estimates

                The only two sell-side firms that issue reports on Rand are BB&T Capital Markets (Richmond, VA) and CJS Securities (White Plains, NY). Here are the analysts’ estimates (in $millions):

                                                 FY13A           FY14E            FY15E

    Total Revenue                     156.6             154.6             157.0

         Freight and related        117.8              125.5             131.4

         Fuel & Surcharges           37.4               26.6               25.4

    EBITDA                                  28.3              31.2               33.1

    EBIT                                        8.1              9.5                  11.2

    Rand has 17.9 million (fully-diluted) shares outstanding, so the market cap is approximately $122 million. The value of the preferred stock plus the accrued dividends is $31 million. The company has $140 mil. in net debt, so the enterprise value is approximately $293 million. Based on this number, RLOG is trading at the following multiples:

                                                FY13A          FY14E            FY15E

    TEV / Revenue                     1.9x              1.9x                1.9x

    TEV / EBITDA                       10.4x             9.4x                8.9x

    TEV / EBIT                             36.2x           30.8x             26.2x

    Rand has historically traded at EBITDA multiples of 8x – 13x, so it is currently at the low end of this range. I believe that the analysts’ estimates and price targets are conservative. The price targets of the two analysts are $8.00 (BB&T) and $8.50 (CJS). The average price target was $10.50 as recently as May, 2013. Although both analysts rate the stock as a “Buy”, I think that they are being careful about raising their estimates until the 2014 sailing season gets underway.

    Valuation

    There are a couple of different ways to value RLOG. The BB&T analyst estimates the company’s NAV at $7.15 per share. If true, then RLOG is trading at only 0.9x NAV. Most analysts will value RLOG on an EV / EBITDA basis. As stated above, analysts expect EBITDA of approximately $31 mil. FY14 and $33 mil. in FY15. If RLOG trades at 9.5x FY15 EBITDA, the stock would be valued at $7.96 / share. I think, however, that there is upside to the FY15 EBITDA estimates. These estimates were little changed after the recent announcement of new contracts. They also assume relatively low utilization estimates. I calculate an EBITDA of approximately $38.0 mil. using these assumptions:

    # Vessels: 15

    Max. sailing days / vessel: 250

    Utilization: 95%

    Adj. margin / day: $12,400

    The stock is valued at $10.61 / share at a 9.5x multiple on $38.0 million. My estimates may be too high, so I am going to use a $10.00 price target. It is important to note that Rand’s business has been relatively weak since the 2008-9 recession. I believe that Rand could exceed $40 million in EBITDA in a stronger market. The company could, for example, put its dry docked ship back into service.

    Recent Deal

                A recent acquisition in the shipping industry provides a benchmark for a valuation of Rand. In November, 2012, International Shipholding completed the acquisition of Jones Act shipper U.S. United Ocean Services (UOS). In the deal, International Shipholding paid $111 million in cash for two handysize bulkers and four tug / barge units. International Shipholding paid approximately 10x EBITDA for UOS, but the cost was actually higher. I understand that the acquired vessels were delivered in poor shape and required $30 - $40 million in immediate capex. This means that International Shipholding may have actually paid 12-13x EBITDA for UOS. The recent acquisition of UOS implies that Rand could trade at 10x EBITDA or higher.

    Conclusion: Rand Logistics (RLOG) is a small company with a big moat. The company has suffered through a few difficult years due to non-recurring problems and macro issues. It appears, however, that the 2014 sailing season will be a strong one for the company. I think that it is a good value stock idea in a market with few value stocks. I think that the stock has 45+% possible upside.

     

     

     

                     

                                       

     

               

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    re-capitalization / elimination of preferred stock, declining competition, rebound in construction industry, winter of '14
     
      Back to top