CLG.L - Clipper Logistics PLC

[kab60]

Came across this Company recently. I think it's a very interesting (and cheap) way to play the ecommerce trend without the risk of betting on just one horse, and the economics are quiet terrific (+30 pct. ROCE, so despite high growth a healthy dividend). I need to do more work but already took a position last week since all that's going on around brexit can make British stocks quiet volatile. I'd love to hear if anyone else has taken a look.

 

Anyway, Clipper Logistics is a well-run, high ROIC business benefiting from secular growth (ecommerce), massive TAM and a solid track record with the founder - owning 25 pct. of the Company - as Chairman overseeing capital allocation.

 

Company description: Founded by chairman Steve Parkin in 1992, Clipper Logistics is a specialist logistics player that handles logistics, warehousing and returns management for traditional retailers as well as some of the biggest ecommerce players in the UK like Asos, Zara and PrettyLittleThing (boohoo) as well as helping Amazon - among others - in continental Europe.

 

While the traditional retail customer-segment is more mature, profits in the e-fulfillment division has grown at a plus +30 pct. CAGR since 2011 (mostly organically). Clipper Logistics also has a small commercial vehicle business which historically has been a decent cash cow but is immaterial to the thesis.

Thesis point 1: Trading at 6,6 FY2020 ev/ebitda estimates or 11 P/E due to brexit fears, accounting technicalities and an unprofitable JV which should be at an inflection point, Clipper Logistics is a way of playing the ecommerce boom. Instead of betting on the gold diggers (ecommerce/retail), Clipper Logistics is a bet on the shovel salesman (logistics - warehousing, returns management (branded Boomerang), technical services (refurbishing returns from Amazon among others).

 

Thesis point 2: Clipper Logistics has an attractive business model with high returns on invested capital (leased warehouses), high cash conversion, little working capital needs and low risk growth since most of the revenue stems from open book contracts (67% of UK

Logistics customers), which means the costs incurred by Clipper Logistics are charged to the customer plus a management fee.

 

Thesis point 3: Profits in fiscal year 2019 (ended April) were disappointing due to various issues that are non-material to the long term thesis or one-time in nature:

 

1) Re-classification of a customer contract has shifted profits of £3m from fiscal year 2019 to 2020 (one-time)

2) The commercial vehicle segment declined - profit down to £1,1m vs. 2,5m prior year

3) Lower gains from real estate sales and services than previous year (£3.1m in 2019 versus £6,4m in 2018)

4) Clicklink, a JV since 2015 with retailer John Lewis for Click and Collect services (3rd parties as Superdry and Urban Outfitters onboard and expanding) has been slow to get to profitability but a price increase in H2 2019 and increased activity should help it get it to profitability in 2020 (grew revenue approx 15 pct. in 2019)

 

Bottom line: Earnings were flat in fiscal 2019, while analysts peg them to grow EPS 43 pct. in fiscal 2020 according to Sentieo.

 

Thesis point 4: Clipper Logistics is pretty much valued as a no-growth Company, but the somewhat funny mix of assets obscures the high growth jewel in e-fullfilment. Or one could call it good co/bad co (though retail actually does okay - while e-fulfilment grew revenues 47 pct. in fiscal 19, non e-fulfilment logistics grew 4,4 pct.)

 

Thesis point 5: Optionality from European expansion. Clipper Logistics generates most of its business in the UK but has a growing presence in Poland and Germany to service continental Europa. That gives the Company a lot of optionalty. If they execute the growth runway is massive (at only 230m GBP marketcap it’s a midcap with 6.600 employees) due to the growth of etailers and omnichannel which increases the complexity of logistics operations and espescially returns management.

 

Risks:

Macroeconomic outlook, Brexit as well as high street retail. While this is mostly a play on e-fullfillment, the mature part of Clipper has high exposure to high street retail and thus there’s a risk of declining volumes or customers getting into financial trouble (though risk of bad debt should be low since Clipper has a right of lien over its customers’ inventory). If customers opt to move outside of the UK due to Brexit, Clipper already offers a solution.

 

Contract renewals/execution. With mid-single digit EBIT-margins and high organic growth, Clipper doesn’t seem to charge excessively for its services, but there’s a risk that customers decide to inhouse logistics or find another provider. 3PL-players like DSV Panalpina has a logistics business as well, and it’s a high-growth market which is bound to attract competition, so it’ll come down to execution (long relationships with players like Asda, ASOS, John Lewis, Morrisons and Superdry as well as winning new ones gives some comfort they won’t drop the ball). They losts two customers in fiscal 2019 (Whistles and Go Outdoors), while they notified a big customer of their intent to terminate a large contract (which they say should immediately improve profitability in 2020). Since fiscal year end 2019 they have commenced activities with four other customers.

[kab60]

Stock up 20 pct. due to preliminary approach from PE firm Sun European Partners. Some 35 pct. up since writeup. Fantastic IRR, but I think it would suck if they sold. Think it's my best idea for a long term growth story. Unfortunately the founder/Chairman, who owns 25 pct., seems to be onboard.

 

https://news.sky.com/story/clipper-logistics-founder-fashions-300m-takeover-bid-11865145

https://otp.tools.investis.com/clients/uk/clipper/rns/regulatory-story.aspx?cid=834&newsid=1346039

[kab60]

Michael Burry/Scion flagged a position. It's a 6 pct position for me after the runup but I do consider adding. At 300 it is still cheap for such a high quality business with a large TAM, and if it gets taken private there might be a bit more upside. Berenberg has a 320 target, and it traded at 450 before. Can't say I'm a expert in merger/risk arbitrage, but it seems interesting in that I for once really like the business and wouldn't mind holding at 300.

[Spekulatius]

Thanks for the update. I put it on my watchlist when you posted, because it looked interesting, but never got around to look into this closer before it ran away.

[kab60]

They also released prelim results today. Underlying EBIT up 26 pct.

 

https://otp.tools.investis.com/clients/uk/clipper/rns/regulatory-story.aspx?cid=834&newsid=1350394

 

Commenting on the results, Steve Parkin, Executive Chairman of Clipper, said:

 

"The Group continues to see impressive revenue and EBIT performance in the first six months of the year, largely driven by the particularly strong growth in e-fulfilment and returns management and an improving contribution from our Clicklink Joint Venture."

 

"A number of new operations have commenced in the period with major customers including Hope & Ivy, Simba Sleep, SLG, Shop Direct and M&S. Our business continues to perform well in Europe, with revenue growth in Poland of 111.6% and Germany of 33.4%. This is supported by a solid new business pipeline in the UK where we continue to offer value-add e-commerce and logistics services, including automation programmes, as we trial robotic technologies with a number of customers."

 

"As retailers increasingly collaborate to minimise their route-to-market costs, Clipper, given its presence and infrastructure in retail logistics, is ideally placed to facilitate consolidation on behalf of retailers."

 

"Trading has continued to be positive post-period end, with the key Black Friday trading weekend seeing record daily volumes in certain sites, and we expect full year earnings to be broadly in line with the board's expectations. Notwithstanding the difficulties facing the UK high street and the uncertainties of the UK political environment in the current year, Clipper remains positive about the longer-term outlook and believe the Group is well positioned to achieve further growth in both the UK and internationally."

[CookingByTheNumbers]

Michael Burry/Scion flagged a position. It's a 6 pct position for me after the runup but I do consider adding. At 300 it is still cheap for such a high quality business with a large TAM, and if it gets taken private there might be a bit more upside. Berenberg has a 320 target, and it traded at 450 before. Can't say I'm a expert in merger/risk arbitrage, but it seems interesting in that I for once really like the business and wouldn't mind holding at 300.

 

Just curious, where are seeing that Burry flagged position?

[kab60]

https://otp.tools.investis.com/clients/uk/clipper/rns/regulatory-story.aspx?cid=834&newsid=1349065

[kab60]

Sold my position. Bidder was granted another month to put forth a bid, stock didn't really react even though I figure it is a small negative. Think it'll go through, but I'll take my gain now and go big if deal does not materialize and it plunges.

[kab60]

Deal didn't go through on the 14th. Stock held up until yesterday and Today. I'm back in Today.

[kab60]

This thing held up well but has finally been slaugthered. Retail is obviously screwed, but I just wanted to share this from a Berenberg report on Clippers' open book contracts and why those are valuable at a time like this:

 

Anyone that might be interested should read their accounts/reports - data providers like Sentieo screw up net debt since it includes leases etc. EV is around 200m verus 400m reported.

 

The majority of Clipper’s logistics revenue (c64% at the time of the IPO, now over 70%)

derives from contracts that are open book in nature, meaning that costs incurred by the

group are directly recharged to the customer, plus a management fee.

 

This then facilitates

good governance for customers as the process provides transparency on the costs that

Clipper occurs on behalf of them, while also protecting Clipper from volume, mix and cost

fluctuations. This is particularly important with fashion retail customers given the

unpredictable nature of revenues, which are driven by weather and short-term fashion

trends. This volatility is exacerbated in the e-commerce environment, so the open book

contract mechanism provides protection against this volume and mix volatility.

 

Clipper can also earn additional management fees through gain-share mechanisms which

share the benefit of cost reductions achieved, or through reward mechanisms linked to

achieving and over-performing contracted KPIs. As a result, management focuses on EBIT

as a KPI for open book contracts rather than margin percentage, since the latter will be

distorted by contract mechanisms.

 

Approximately 14% of logistics revenue derives from minimum volume guarantee

contracts, which protect Clipper against volume shortfalls. The remainder of Clipper’s

logistics revenue is generated from more traditional closed book contracts, where revenue

is volume driven, and profits are therefore dependent on managing your cost base against

activity levels, creating higher operational gearing.

 

 

[kab60]

So this is mostly me talking to myself and keeping notes, but Company sent this out the other day - basically confirms that they aren't very affected by coronavirus so far due to the above mentioned open book contracts. I don't know many other business with such a large TAM, such a high growth rate, just a high ROIC and such a low valuation (and apparently rejecting a PE suitor two months ago for twice the price of where it trades today). With a large founder at the helm. They've gotten some criticism recently for still operating their warehouses when something like online apparel sales isn't necessarily urgent. Understand the criticism but it's probably near impossible to refuse to handle their customers' logistics without a government order in hand:

 

The Board is continuing to monitor the overall impact of COVID-19 on the business, both in terms of its operations and the effect on its customers. The Company will update the market in due course when the position becomes clearer. However, it should be noted that the Group’s contract mechanisms in the logistics sector both in the UK and Europe provide a good degree of profit protection and cash generation in the event of volume reductions, and this has resulted in only a modest impact on the Company’s performance to date.

 

The Company is expecting net debt at its 30 April 2020 year end to be c.£42.0 million, slightly more than 1x EBITDA (pre-IFRS16 adjustments). At that level, it would have headroom of over £30.0 million in its banking facilities, and very substantial headroom against its net debt covenant of 2.5x EBITDA.

 

In addition, Clipper is owed £29.0 million from its open book customers in respect of capital expenditure funded on their behalf and due to be repaid over the balance of their contracts. Such asset funding only takes place where a customer’s credit status warrants this. The Company’s ‘look through’ year-end net debt, adjusting for these sums, is therefore expected to be c. £13.0 million.

 

Clipper will continue to provide support through utilising and mobilising its Europe-wide sites, personnel and fleet thereby alleviating significant supply chain pressure which benefits retailers and consumers alike.

[grym02]

Interesting idea. Two questions:

 

- How do CLG's economics (margins, ROICs) compare on e-fulfillment vs. traditional retail logistics?

- What's your estimate of levered and unlevered multiples today? So both P/E or FCF multiple along with EV/EBIT?

[kab60]

Interesting idea. Two questions:

 

- How do CLG's economics (margins, ROICs) compare on e-fulfillment vs. traditional retail logistics?

- What's your estimate of levered and unlevered multiples today? So both P/E or FCF multiple along with EV/EBIT?

Margins are higher on traditionel retail, but margins doesn't matter much here. Their open books contracts means it is basically a cost plus model. So little operating  leverage, but that also means they have little volume risk - pretty great right now. Not sure they disclose invested capital per segment, but not sure it matters much, it is very asset light. They lease their warehouses, no spec, so only when they have a firm contract. So 24m equity end of October, probably will do 40 ebitda per guidance. Versus marketcap of 150m plus some 40m in debt (but most is from contractual capex that customers have to pay back). I'm a bit tipsy, so this all back of envelope.

[gym97]

I found out that Burry owned this and googled his name and found this threat.

 

Anyways, I own clipper too. Fantastic business. Doesn't take capital, e-commerce side of business can grow double digits for a long time. Brick and mortar side probably still MSD growth given more retailers are outsourcing logistics to specialists like Clipper. Even in this current environment, would expect brick-and-mortar side to see some declines (my ballpark is maybe 30% this year) but based on the announcements over the last few weeks, it sounds like they've been able to offset this by managing more of thier large existing customer logistics, including grocery logistics for M&S and John Lewis (Waitrose grocery I think) I believe. Brick and Mortar is about 40% of EBIT if I recall correctly.

 

You should try looking at ID Logistics. They are closest comparable based in France at 30x P/E which I think reflects the high quality nature of the company! Otherwise, their main competitors would include DHL and XPO. The third-party logistics (3PL) business is probably the crown jewel of XPO's business.

 

[kab60]

I found out that Burry owned this and googled his name and found this threat.

 

Anyways, I own clipper too. Fantastic business. Doesn't take capital, e-commerce side of business can grow double digits for a long time. Brick and mortar side probably still MSD growth given more retailers are outsourcing logistics to specialists like Clipper. Even in this current environment, would expect brick-and-mortar side to see some declines (my ballpark is maybe 30% this year) but based on the announcements over the last few weeks, it sounds like they've been able to offset this by managing more of thier large existing customer logistics, including grocery logistics for M&S and John Lewis (Waitrose grocery I think) I believe. Brick and Mortar is about 40% of EBIT if I recall correctly.

 

You should try looking at ID Logistics. They are closest comparable based in France at 30x P/E which I think reflects the high quality nature of the company! Otherwise, their main competitors would include DHL and XPO. The third-party logistics (3PL) business is probably the crown jewel of XPO's business.

Hi gym, thanks for the input and suggestion re ID Logistics. Didn't know about that one. Nice to finally meet a fellow shareholder!

 

I agree on everything you wrote - I think this is a fabolous little jewel which was underscored by the PE interest in December for anyone in doubt (I luckily made a good bit of money by trading the buyout news). I think it's probably my best GARP idea, which is also why I was a bit sad to see the Company entertaining a bid, but whatever, didn't go through. Lots of competitors - like XPO, DHL and DSV - I'm sure would love to pick them up at these levels.

 

They won the NHS contract to supply the UK healthcare system with PPE during Covid19 and have basically proven what a resilent model they have. The economics, as you point out, are fantastic, and the open books contracts which I liked before Covid19 are obviously a real star during these times. I'm surprised there's so little interest on here, but anecdotally that's usually a good thing.

[kab60]

European expansion: https://wbj.pl/p3-poznan-tailored-to-e-commerce/post/127089

[kab60]

Smashing Company update. Growth accelerating during Covid19. I really find the lack of interest here interesting - to say the least. It's a royalty on e-commerce with fantastic economics, unlike a lot of other plays disruption risk seems very limited. Some highlights from update here:

 

Following the initial period of disruption, Clipper has experienced strong levels of activity from both new and existing clients. In particular,  the Company has provided support to online retailers with high e-fulfilment volumes, as some online retailers experienced extremely high levels of demand, regularly outstripping that seen over the Black Friday period last year. We are witnessing volume increases of over 100% on a like-for-like basis with some customers.

 

In total, the new activities brought on since lockdown, coupled with new contracts coming on stream in Q1 FY21, will add a further 1.5 million square feet of space to Clipper's pre-existing 10 million sq. ft. infrastructure.  The Group has also seen a significant increase in its tender pipeline; the annualised revenue of the probability-weighted pipeline stood at over £50 million as at 18 May 2020, a significant increase on the same period last year.

 

Meanwhile, Clipper's European business continues to grow rapidly, driven by a growing presence in e-fulfilment and returns management. Revenue in Europe grew by 41.3% in FY19 and by a further 33.7% in FY20.

 

The Company-compiled consensus for EBITA for FY21 is £25.8m. Whilst COVID-19 still presents some risk, the Board believes that EBITA will be comfortably ahead of these expectations.

 

More here:

 

https://www.londonstockexchange.com/news-article/CLG/year-end-trading-update-the-effect-of-covid-19/14561118

 

As I mentioned before, Company screens badly due to leases.

[paperwerks]

The stock price was 305 Pence yesterday.

 

Do you think it was a better buy two months ago at 135 Pence?

 

Or, does it not matter, and we should just pay up?

[jefke]

Smashing Company update. Growth accelerating during Covid19. I really find the lack of interest here interesting - to say the least. It's a royalty on e-commerce with fantastic economics, unlike a lot of other plays disruption risk seems very limited.

 

I appreciate all the updates :)

 

Was just reading that company update. I'm kind of new to the game, but I can't recall the last time I read such a bullish press release.

[kab60]

The stock price was 305 Pence yesterday.

 

Do you think it was a better buy two months ago at 135 Pence?

 

Or, does it not matter, and we should just pay up?

It was a much better buy two months ago, since anyone with insight into their business could figure out they'd do okay. But most stuff was a better buy two months ago, so I'd try and pack that feeling of missing the bus away and asses it at the current level, which I think is a fair price for a great business. Say they do 30m ebita, net debt at 1x, and it trades around 11xebita with what seems like a long runway of double digit growth at a high ROIC. Plus, ClickLink inflecting so a losing segment starts adding to profitability.

[kab60]

It has been on somewhat of a tear recently. Bullish interview with CEO here: Clipper Logistics' agility highlighted by the pandemic

https://www.proactiveinvestors.co.uk/companies/amp/news/926243?__twitter_impression=true

[Libs]

I found out that Burry owned this and googled his name and found this threat.

 

Anyways, I own clipper too. Fantastic business. Doesn't take capital, e-commerce side of business can grow double digits for a long time. Brick and mortar side probably still MSD growth given more retailers are outsourcing logistics to specialists like Clipper. Even in this current environment, would expect brick-and-mortar side to see some declines (my ballpark is maybe 30% this year) but based on the announcements over the last few weeks, it sounds like they've been able to offset this by managing more of thier large existing customer logistics, including grocery logistics for M&S and John Lewis (Waitrose grocery I think) I believe. Brick and Mortar is about 40% of EBIT if I recall correctly.

 

You should try looking at ID Logistics. They are closest comparable based in France at 30x P/E which I think reflects the high quality nature of the company! Otherwise, their main competitors would include DHL and XPO. The third-party logistics (3PL) business is probably the crown jewel of XPO's business.

Hi gym, thanks for the input and suggestion re ID Logistics. Didn't know about that one. Nice to finally meet a fellow shareholder!

 

I agree on everything you wrote - I think this is a fabolous little jewel which was underscored by the PE interest in December for anyone in doubt (I luckily made a good bit of money by trading the buyout news). I think it's probably my best GARP idea, which is also why I was a bit sad to see the Company entertaining a bid, but whatever, didn't go through. Lots of competitors - like XPO, DHL and DSV - I'm sure would love to pick them up at these levels.

 

They won the NHS contract to supply the UK healthcare system with PPE during Covid19 and have basically proven what a resilent model they have. The economics, as you point out, are fantastic, and the open books contracts which I liked before Covid19 are obviously a real star during these times. I'm surprised there's so little interest on here, but anecdotally that's usually a good thing.

 

Kab

 

Nice thread, congrats on the returns so far.

How are they able to so successfully compete with such behemoths as XPO and DHL? Is it simply a matter of more nimble management?

[kab60]

Thanks. I can't admit to know how exactly they diffentiate themselves, but it's very much a service business which largely comes down to execution, and if you look at their track record they very much seem to know how to execute (that's the impression one gets when looking at their customers, new customer wins etc). While scale is an advantage because it gives one an opportunity to spread IT costs and systems across a wider base and leverage those costs, a lot of the costs are warehouses and warehouse workers where there's less scale benefits. I also think there's some value to being a pureplay provider (agile, a specific segment getting all the attention etc.) versus say a DHL or XPO where 3rd party logistics is just a minor component. Also, while Clipper is a small - but rapidly growing player - in Continenal Europa, they have some of the biggest ecommerce customers in the UK, so I don't think scale is at all an issue.

[kab60]

Results out this morning, they seem to absolutely crush it.

 

Group revenue increased by 8.8% from £460.2m to £500.7m.

 

Group EBIT1 up 19.1% to £24.1m (2019: £20.2m).

 

Group profit after tax of £16.2m (2019: £13.4m).

 

Basic earnings per share were 15.9 pence (2019: 13.2 pence), an increase of 20.5%.

 

Cash generated from operations1 of £31.9m (2019: 28.3m).

 

Strength of performance and cash generation leads the Board to recommend a final dividend of 6.2p per share, making a total dividend per share of 9.7p for the full year (2019: 9.7p).

 

Net debt at 30 April 2020 was just over 1xEBITDA, representing very substantial headroom against the net debt covenant of 2.5x.

[jefke]

Thanks for all the updates kab60!

 

-

 

4.9M shares traded today near closing time, with daily avg of about 130k  :o

 

I don't know if that should mean anything, but it's interesting.