Small Caps | Sep 13 2023
This story features LINDSAY AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: LAU
Brokers are excited about the growth prospects of rural transport and logistics company Lindsay Australia as it becomes the number one player in its industry
-Lindsay Australia showcased solid FY23 financials
-Competitor failure opens huge opportunity
-M&A adds scale
By Greg Peel
In April this year, private company Scott’s Refrigerated Logistics was placed into liquidation. The administrators attributed the group's failure in part due to its increased reliance on contractors and subcontractor labour, which was more expensive.
They also noted insufficient investment in the transport fleet, insufficient cash flow, and a reliance on external funding to support operating losses. Intense market competition, substantial overheads, and an inability to pass on the costs of inflation to customers contributed to the pressures the company faced.
The receivers at Korda Mentha took control of the company and its assets with the intention of selling the businesses, but were not able to find a buyer. Hence, a move to sell "sizeable packages of assets" with any remaining assets to be consolidated and auctioned at locations nationally.
One of those buyers was competitor Lindsay Australia ((LAU)), a Brisbane-based transport, logistics, and rural supply services business to the food processing, food services, fresh produce, and horticulture sectors in Australia. Lindsay picked up fleet assets from Scott’s at attractive prices.
In July, Lindsay acquired private company WB Hunter, which was founded in Shepparton, Victoria, in 1947. The acquisition will allow Lindsay to add a diversified sales mix of key agricultural supplies and supporting services with a broad base of more than 10,000 commercial and retail customers, expanding the company’s presence in NSW and Victoria and providing a strong platform for pursuing further growth opportunities across these regions, Lindsay’s CEO noted at the time.
Brokers covering Lindsay are quite effusive about the company’s growth trajectory. Lindsay reported an earnings result in late August at the top end of management's guidance range. The result, said Morgans, “highlights the group’s ability to adapt to changing market dynamics during the year, as it captured material market share gains following the exit of Scott’s in the second half”.
Shaw and Partners notes that while former CEO Kim Lindsay had been critical to the success and growth of the company over the past decades, the broker believes Lindsay possesses deep management experience and expertise, notably in COO Craig Baker and CFO Justin Green, both of whom have been with the company for over 20 years. Shaw also views new CEO, Clay McDonald, who is ex-Aurizon Holdings and has extensive external experience, to be an “excellent hire”.
One presumes the “ability to adapt to changing market dynamics” and management experience are reasons why Lindsay has thrived where Scott’s failed. Investors thus need not tar Lindsay with the same brush.
The other issue that may worry investors, having watched shares in Elders ((ELD)) fall -37% year to date, is that agriculture-linked companies are in for tough times as El Nino takes over where La Nina left off, suggesting dry conditions and possible drought. Ord Minnett suggests, however, fear not.
The rural business capped off a soft second half but has now cycled through excess inventories and has a level of insulation from climatic conditions, the broker points out, given it specialises in irrigated cropping areas.
The WB Hunter acquisition also diversifies revenues into new horticultural regions. Meanwhile, Lindsay has absorbed a sizable piece of the around a $500m revenue market share previously held by Scott’s, and further expanded its market position by investing in fleet size and national capabilities.
Shaw suggests the departure of Scott’s is a “huge” opportunity for Lindsay and potentially transformational given Scott’s was the incumbent number one player in the industry with some 10% share. This, combined with further industry consolidation, has resulted in an unprecedented surge in demand for transport services.
Wilsons notes the company’s Rural segment managed the industry-wide challenges of inventory destocking and price deflation admirably, achieving an FY23 earnings margin of 6.9%, well above pre covid margins of less than 4%.
Ord Minnett notes FY24 will see a full twelve-month earnings contribution from Lindsay’s large road and rail fleet, with what the broker believes to be longer contract duration and better terms. Return on equity expansion to above 30% is testament to this improving position.
Management revealed momentum in the Transport segment has continued into first half FY24, with market dynamics remaining positive. The company anticipates further industry consolidation will occur in both the Transport and Rural sectors. Lindsay did note FY24 may see a slight softening in Rural volumes, however Wilsons senses there may be conservatism baked into this guidance.
Morgans suggests the company boasts solid capacity to deliver organic growth across the group into FY24, and believes Lindsay Australia remains well positioned to undertake further M&A to benefit from ongoing market consolidation within the fresh and refrigerated logistics market.
Shaw believes Lindsay is ideally positioned for long-term and profitable growth, with a very attractive and large total addressable market, which is very fragmented, thereby enabling the company to garner further market share (it is already a category leader), and to pursue and drive scale.
Lindsay is now positioned for further growth, has moderate debt, pays a dividend, management expertise is high, returns are high and the risk/reward equation is compelling, the broker suggests. Valuation is also considered attractive with an FY24 price/earnings forecast multiple of 8.2x. ASX-listed peers trade on an average FY24 PE of 14.4x.
All of Shaw and Partners, Ord Minnet, Morgans and Wilsons have a Buy or equivalent rating on Lindsay Australia. Their average target price is $1.59, suggesting 36% upside to the last traded price.
The stock also offers a forecast dividend yield in excess of 5%.
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