RLOG - Rand Logistics

[Bart]

Hi All,

 

my first post on this board, thought it was time to take the next step after lurking around for a year or two (thanks to all of you already for the very knowledgeable discussions). My plan over the next few weeks is to post a write up on the stocks in my portfolio, to invite feedback and discussion, and to force me to improve my thought process / increase my discipline.

 

In this post, I'd like to analyse and sort out my thoughts on a company I initially invested in early 2010, when it was priced ridiculously cheap compared to its performance IMO (hat tip Paul Sonkin). Currently it represents about 9% of my portfolio.

 

Rand Logistics, Inc. (Rand) is a shipping company engaged in the operation of bulk carriers on the Great Lakes. A good overview of their business can be found in their most recent corporate presentation:

 

http://sec.gov/Archives/edgar/data/1294250/000119380511001029/e608515_ex99-1.htm

 

From their presentation:

 

- Leading provider of dry bulk commodities freight shipping business throughout the great lakes

- Over 95% of business under long-term contract insulates from any significant pricing pressure

- High barriers to entry

- Increasing market share, due to cost-efficient operating model, size and composition of fleet (i.e. river class, bow booms) and scheduling flexibility

- Fuel surcharges protect against rising fuel prices

- Strong track record of accretive acquisitions, e.g. In February 2011, the Company acquired two Jones Act compliant, self-unloading integrated tug/barge units from KK Integrated Shipping (KKIS) which is expected to add increase FCF with 25 to 30% FY 2012.

 

Metrics:

- P/FCF: 5.3 - 6 (Based on management estimates for FY 2012)

- EV/FCF: 12.4 - 13.9 (Mkt cap: 101.5M; Debt: 113M; Preferreds: 14.9M; Cash: 7.5M) Based on pro-forma numbers after the recent acquisition of the 2 vessels, and management’s low estimate for FCF 2012

- P/B = 1.3

-      EV/EBITDA =~ 7 (Based on FYE 2012 EBITDA of 34M)

 

Why am I invested:

- High barriers to entry: Rock solid moat, no new vessels have been built to sail on the lower lakes for ages (can't find the link anymore).

- Management’s stake is about 13%. I have been listening to the last 6-7 conference calls, they strike me as very honest, prudent, and tend to underpromise and overdeliver. They only invest if they estimate the ROI in the high teens.

- Excellent operational execution, management seems to be very efficient.

 

My main question: They carry quite a lot of debt (debt/equity=1.6), however, they certainly have no problems servicing the interest and debt seems to be used very cautiously e.g. for accretive asset purchases. I’d be very interested to getting feedback on the use of P/FCF or EV/FCF in this case? Should the P/FCF multiple to value this company at be discounted significantly because of the debt (as I think it should since it would take them a few years to pay off the debts if they just focused on that from now on)?

 

Conclusion: Certainly not very very cheap at the moment, and maybe no immediate huge upside potential, but I still consider it a solid investment which certainly doesn’t keep me awake at night. Further upside will likely follow from paying down debt, possibly instating a dividend or accretive purchases. Happy to be invested alongside management.

 

I’d be very interested in what you guys would need as an EV/FCF or P/FCF ratio for this kind of rock solid company (my humble opinion) in order to spike your interest. Any feedback would be very much appreciated!

 

Thanks from a Belgium based value investor

 

[Myth465]

I like the idea but the multiples are a bit high inmo. The price to FCF multiple is very nice but its not cheap on an EV basis. My issue is I dont see the multiples going up given the situation. So you are investing and aiming to capture the growth that Management can bring in.

[Liberty]

Welcome to the board, thanks for writing!

[twacowfca]

A few questions:

 

The Achilles Heel of what you describe is probably the debt unless it is long term and with few restrictive covenants.  Is it mostly bank debt?  The preferred stock is an expensive type of financing because preferred dividends come out of after tax earnings. 

 

What's the long term record of the company?  Not just five or ten years, but 20+ years?

 

Welcome to the board as an active poster.  :)