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VTNC write-up final

VTNC write-up final

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Published by AIGswap
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Categories:Types, Research
Published by: AIGswap on Jan 25, 2013
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07/31/2013

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Event-driven Long: Vitran Corporation (NASDAQ: VTNC, TSX: VTN), a turnaround play at a key inflectionpoint
with “hidden assets” and near term catalysts
that hav
e granted shareholders two “put options” on
the stock, reducing downside risk. I believe that this stock offers 100% - 180% upside in the mediumterm.
Summary
Vitran Corporation (
“Vitran”, “VTNC”, or the “Company”
) is a trucking company that offers Less-than-Truckload (
LTL
) and Supply Chain (
SCO
) services to shippers across 34 states and Canada. VTNCtransports goods largely for retail, manufacturing and chemical customers, and also handles logistics formainly retail customers.While the Company
’s operations are
US-focused, VTNC incorporated in 1981 in Ontario, under BusinessCorporation Act (Ontario), which is important because poison pills in Canada are essentially useless in ahostile take-over scenario. I mention this because two LTL competitors, Transforce (TSX: TFI) and Clarke(TSX: CKI) have both taken advantage of the depressed share price to establish 1.7mm share (10.75%)and 1mm share (6.2%) toe-holds in the Company, respectively. Both investors have recently filed 13Dsand each has a different plan for VTN
C, which in TFI’s case could be a hostile take
-over.
The Company’s
main asset, its US LTL operation, has been a poor performer and clouds the results fromits other two fantastic businesses. It has recently made significant operational and managementchanges to the US LTL business in 2012 and expects a turnaround as a result of revenue and cost-cuttinginitiatives. If no near-term operational turnaround occurs and the stock lags, evidence indicates that TFImay launch a take-over or CKI may try to split up the C
ompany. These two “put options
reduce thedownside if the turnaround
plan is fruitless. VTNC’s high operational leverage and mo
derate financialleverage give shareholders high torque to the turnaround scenario. This unique combination of highpotential upside with downside protection makes Vitran a highly asymmetric investment opportunity.
Company Overview
US$000s
VTNC US Equity$6.37Basic Shares O/S16,399Dilutive Securities71F/D Shares16,470Market Cap$104,917Term Bank Credit Facilities$2,750Revolving Credit Facilities$42,656Real Estate Facility$45,768Capital Leases$6,751Total Debt$97,925Cash$0Net Debt$97,925
Enterprise Value$202,842
EV / EBITDA (2014E consensus)5.1x
 
VTNC’s business can be grouped into three segments:
 1.
 
US LTL
 –
This segment represents 61.5% of revenue. VTNC has spent $171.4mm, in addition tosignificant additional capex, on four acquisitions over the past 8 years to build this business.
Even though this segment represents a majority of the company’s revenue, not to mention that
the Company has spent almost its current enterprise value on these acquisitions, the marketvalues this segment at zero. That is because it has been an operational disaster, with industry-lagging operating ratios (defined as: 1
 –
EBIT margin) for numerous years. VTNC does notsegment its LTL results. I estimate US LTL is causing a $23mm annual EBITDA loss.2.
 
Canadian LTL
 –
This segment represents 24
% of revenue and is one of the Company’s “gems”.
 Historically it has a <95% operating ratio. Combined, Canadian LTL and SCO had 31% pre-taxreturn on capital in 2011. I estimate Canadian LTL generates $15mm - $17mm annual EBITDA.3.
 
SCO
 –
This segment represents 15% of revenue. Vitran operates 16 facilities (10 US, 6 Canada)with 2mm square feet of warehouse space used to execute logistics services for third parties.
The SCO represents another “hidden gem”, as the poor US LTL results have clouded
theexcellent numbers coming from the SCO segment. Vitran has grown SCO from scratch a decadeago mainly organically, save for the acquisition of Las Vegas LA Express in November 2007 for$12.6mm ($3.5mm EBITDA). The SCO segment has a 92% operating ratio and I estimategenerates about $12mm annual EBITDA.Since the Company does not geographically segment its operating ratio, I backed into the consolidatedoperating ratio using guidance from the Q2 2011 conference call, in which CEO Richard Gaetz stated
Our Canadian LTL business is, as you know, an asset-lighter model. So when it runs optimally, it runskind of low mid 90s, if that makes sense, kind of 92-
93 range, when it’s running optimally. Right now, it’s
operating sub-
95, so it’s doing fine in this recovery period. There is upside for us for sure, but it’soperating very well and generating great returns on capital as it normally does… And our US LTL business
operated over 100 in Q2. The last two months, it operated at just over 100, under 101 and just over 
100… It’s absolutely unacceptable… we’re chasing 8 operating points.
I utilized my estimatedsegmented OR to estimate the segmented EBITDA, which gives a clearer picture of the poor state thatthe US LTL operation is in, which when consolidated with the very good SCO and Canadian results, paintsVTNC as a whole to be a bad company.
 
 
Turnaround
Vitran’s stock price would most likely react positively to a decline in operating ratio.
Over the past six
years, VTNC’s stock price and quarterly oper
ating ratio have had a -0.85 correlation
It is hard to imagine VTNC’s operating getting much worse than Q3 2012’s 105.2, which was over 700
bps higher than the second worse competitor. At this operating ratio, VTNC is losing over 5 cents pereach dollar of revenue. It would be better to just turn down customers, which would automatically leadto better numbers. The CEO stated in the Q2 2012 conference call that "
by this time next year should  provide our US LTL operation with about seven points of operating improvements
". This forecast wouldplace the US LTL OR at around 97-98, bringing the overall operating ratio slightly worse than peer
Segmented Data
LTM201120102009200820072006200520042003
EBITDA
LTL-$8,536$5,408$21,200$14,618$27,253$42,105$39,203$30,452$22,058$20,088SCO$11,253$11,692$8,561$7,078$6,035$3,959$3,101$2,516$1,993$1,326Corporate-$5,361-$5,023-$4,504-$3,930-$4,558-$5,025-$4,356-$3,461-$2,201-$2,203Total-$2,644$12,077$25,257$17,766$28,730$41,039$37,948$29,507$21,850$19,211
Operating Ratio
LTL103.3%101.4%99.2%100.5%98.5%96.0%93.7%93.1%94.2%94.3%SCO91.8%91.4%92.4%92.8%94.6%93.8%93.3%94.7%95.3%96.2%
Estimated Segemented LTL OR
LTL - Canada95.0%94.5%92.0%92.0%LTL - US106.5%104.0%102.0%104.0%
Estimated Segmented EBITDA
LTL - Canada$14,168$14,714$18,475$16,714LTL - US-$22,443-$9,103$3,796-$2,397SCO$11,253$11,692$8,561$7,078Corporate-$5,361-$5,023-$4,504-$3,930
$0.00$4.00$8.00$12.00$16.00$20.00$24.0084889296100104108
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   O   p   e   r   a   t   i   n   g   R   a   t   i   o
Operating RatioStock Price
Correlation: -0.85

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