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“hidden assets” and near term catalysts that have granted shareholders two “put options” on the stock, reducing downside risk. I believe that this stock offers 100% - 180% upside in the medium term. Summary Vitran Corporation (“Vitran”, “VTNC”, or the “Company”) is a trucking company that offers Less-thanTruckload (“LTL”) and Supply Chain (“SCO”) services to shippers across 34 states and Canada. VTNC transports goods largely for retail, manufacturing and chemical customers, and also handles logistics for mainly retail customers. While the Company’s operations are US-focused, VTNC incorporated in 1981 in Ontario, under Business Corporation Act (Ontario), which is important because poison pills in Canada are essentially useless in a hostile 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 13Ds and each has a different plan for VTNC, 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 from its other two fantastic businesses. It has recently made significant operational and management changes to the US LTL business in 2012 and expects a turnaround as a result of revenue and cost-cutting initiatives. If no near-term operational turnaround occurs and the stock lags, evidence indicates that TFI may launch a take-over or CKI may try to split up the Company. These two “put options” reduce the downside if the turnaround plan is fruitless. VTNC’s high operational leverage and moderate financial leverage give shareholders high torque to the turnaround scenario. This unique combination of high potential upside with downside protection makes Vitran a highly asymmetric investment opportunity. Company Overview
US$000s VTNC US Equity Basic Shares O/S Dilutive Securities F/D Shares Market Cap Term Bank Credit Facilities Revolving Credit Facilities Real Estate Facility Capital Leases Total Debt Cash Net Debt Enterprise Value EV / EBITDA (2014E consensus)
$6.37 16,399 71 16,470 $104,917 $2,750 $42,656 $45,768 $6,751 $97,925 $0 $97,925 $202,842 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 to significant 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 market values this segment at zero. That is because it has been an operational disaster, with industrylagging operating ratios (defined as: 1 – EBIT margin) for numerous years. VTNC does not segment 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-tax return 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 the excellent numbers coming from the SCO segment. Vitran has grown SCO from scratch a decade ago 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 estimate generates about $12mm annual EBITDA. Since the Company does not geographically segment its operating ratio, I backed into the consolidated operating 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 runs kind 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’s operating 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 estimated segmented OR to estimate the segmented EBITDA, which gives a clearer picture of the poor state that the US LTL operation is in, which when consolidated with the very good SCO and Canadian results, paints VTNC as a whole to be a bad company.
Segmented Data EBITDA LTL SCO Corporate Total Operating Ratio LTL SCO Estimated Segemented LTL OR LTL - Canada LTL - US Estimated Segmented EBITDA LTL - Canada LTL - US SCO Corporate
-$8,536 $11,253 -$5,361 -$2,644
$5,408 $11,692 -$5,023 $12,077
$21,200 $8,561 -$4,504 $25,257
$14,618 $7,078 -$3,930 $17,766
$27,253 $6,035 -$4,558 $28,730
$42,105 $3,959 -$5,025 $41,039
$39,203 $3,101 -$4,356 $37,948
$30,452 $2,516 -$3,461 $29,507
$22,058 $1,993 -$2,201 $21,850
$20,088 $1,326 -$2,203 $19,211
$14,168 -$22,443 $11,253 -$5,361
$14,714 -$9,103 $11,692 -$5,023
$18,475 $3,796 $8,561 -$4,504
$16,714 -$2,397 $7,078 -$3,930
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 operating ratio have had a -0.85 correlation
Stock Price 84 $0.00
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 per each dollar of revenue. It would be better to just turn down customers, which would automatically lead to 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 would place the US LTL OR at around 97-98, bringing the overall operating ratio slightly worse than peer
average. The Company has sufficient liquidity for now to execute, with $20.5mm of available credit facilities.
Arkansas Best Corp Saia Inc (Consolidated) 115.0 Con-way Inc (LTL segment only) Vitran Corp Inc (LTL segment only) FedEx Corp (LTL segment only) TransForce Inc (LTL segment only) Old Dominion Freight Line Inc
80.0 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Although each line item has room to improve, management states that labor remains the biggest opportunity to reduce expenses. The recent poor results could partly be blamed on significant recent management changes, with 14 executives replaced in the five months to Q2 2012 and an additional five in Q3, along with a total of 23 facility managers (31% of total facilities, 12 in Q3). On January 10 2012, Vitran hired highly-respected former Fedex Freight executive Chris Keylon as US LTL President to spearhead this turnaround. In Q2 2012 management outlined its “11 point plan” to improve operating results over the next 12 months, with the goal of a 7 percentage point improvement operating ratio. The clock is ticking… Valuation Vitran has spent considerable money on US LTL acquisitions to gain size by consolidating smaller operators:
Announce Date Target Announced Value ($mm) Payment Type Revenue EBITDA (LTM) EBITDA % EV / EBITDA (LTM) EV / Sales (LTM)
14-Jan-11 2-Oct-06 19-Dec-05 31-May-05
LTL Business of Milan Express PJAX Freight System Sierra West Express Inc Chris Truck Line
$7.6 $132.0 $2.5 $29.3 $171.4
Cash Cash and Stock Undisclosed Cash and Stock
$70.0 $175.0 $16.0 $28.9 $289.9 $25.5
n/a $23.1 $1.0 $4.6 $28.7 $3.5
n/a 13% 6% 16%
7.6x 16.0x 6.3x 10.0x
0.1x 0.8x 0.2x 1.0x 0.5x 0.5x
Total / Average SCO: 30-Nov-07 Las Vegas LA Express Inc
The Company’s LTL acquisitions have been completed around 6.0x – 7.5x EBITDA. Other comparable transactions have been within this range:
EV ($mm) EV/EBITDA EV/Rev (LTM) (LTM) EBITDA Margin (LTM) EV/EBITD A (NTM) Price / Book Premium to Unaffected
1-Jun-12 Arkansas Best 1-Feb-12 Entrec Transportation 1-Nov-11 Radiant Logistics 1-Sep-11 The Gores Group 1-May-11 Roadrunner Transportation 1-Feb-11 Roadrunner Transportation 1-Dec-10 TransForce 1-Sep-10 Trucking Investment
Panther Expedited Singer Specialized Isla International Clark Holdings Bruenger Trucking Morgan Southern Dynamex US 1 Industries Average
$180.0 $15.3 $15.0 $7.7 $13.6 $20.0 $220.0 $29.8
7.5x 3.8x 5.0x 4.5x 3.9x 5.0x 10.4x 9.9x 6.3x
0.8x 0.6x 0.1x 0.4x 0.5x 0.2x 0.4x
11% 12% 3% 7% 5% 2% 7%
63% 43% 92%
Historically, D&A has been about 2% of revenue. Combining this with the previously estimated segmented ORs, I estimate a segmented EBITDA in the sum of parts analysis below. I value Canadian LTL in-line with precedent transactions of 6.0x – 7.0x. The SCO segment is higher growth and deserves a higher multiple of 7.5x – 8.5x. The result is $90mm - $120mm for Canadian LTL and $80mm - $110mm for SCO. The sum of these two operations gets us to the current enterprise value of the Company (ignoring G&A), implying that the market values the US LTL business at zero. As for valuing the US LTL operations, I look at two scenarios. The first scenario imagines a US LTL turnaround in which ORs go in-line with peers at 95% and EBITDA margins around 7%. Applying a 5.0x – 5.5x multiple, which is where the sector has traded historically, I get to a value of $165mm - $195mm for this segment. The second scenario imagines no turnaround and values the segment at 0.1x – 0.2x revenue, in-line with other poorly performing transportation companies. The result is $50mm $100mm for US LTL (which was pieced together for $170mm+). Adjusting for G&A and net debt gets us to intrinsic values well in excess of the current stock price, as shown below. In addition, the Company has $65mm of NOLs, which could further bolster US LTL value in a turnaround situation (I have ascribed no value to these).
Canadian LTL Estimated Revenue Estimated Margin Estimated EBITDA Multiple Canadian LTL Value % of Current EV SCO Estimated Revenue Estimated Margin Estimated EBITDA Multiple SCO Value % of Current EV VTN Ex-US LTL Value % of Current EV US LTL (Turnaround Scenario) Estimated Revenue Theoretical Margin Estimated EBITDA Multiple US LTL Value (Turnaround) US LTL (No Turnaround) Estimated Revenue Multiple US LTL Value (No Turnaround) Corporate G&A (@7x) Net Debt Intrinsic Value with Turnaround per share Upside Intrinsic Value without Turnaround per share Upside
$200,000 7.5% $15,000 6.0x $90,000 44.4%
$200,000 8.5% $17,000 7.0x $119,000 58.7%
$125,000 9.5% $11,875 7.5x $89,063 43.9% $179,062.50 88.3%
$125,000 10.5% $13,125 8.5x $111,563 55.0% $230,562.50 113.7%
$510,000 6.5% $33,150 5.0x $165,750
$510,000 7.0% $35,700 5.5x $196,350
$510,000 0.1x $51,000 $37,527 $97,925 $209,360.50 $12.71 100% $94,610.50 $5.74 -10%
$510,000 0.2x $102,000 $37,527 $97,925 $291,460.50 $17.70 178% $197,110.50 $11.97 88%
Shareholder Actions On October 8 2012, Clarke filed a 13D with a letter to the Chairman attached. Clarke is a hybrid operating company and investment firm with an EV of $140mm. It is run by activist George Armoyan. Clarke runs a Canadian LTL operation, which accounts for 86% of its revenue. The letter detailed disappointment in management, accusation of poor allocation of capital (true), the threat of a proxy battle, in addition to a restructuring plan. This plan includes selling the SCO segment for $100mm, implementing a substantial issuer bid at $7.00 per share and redeploying capital to the Canadian LTL business. Clarke estimates this restructuring would lead to a VTNC share price of $12.00 - $18.00.
Interestingly enough, in its Q2 2012 MD&A it states that “Clarke also believes that Vitran’s Canadian LTL business would complement Clarke’s freight transportation business”. So Clarke clearly has an ulterior motive here. Armoyan requested a board seat but was ultimately rejected because Clarke is a competitor. There is no question that a corporate restructuring would unlock significant value at VTNC. CKI owns 1,008,417 VTNC shares (6.15%). On December 31 2012, Transforce filed a 13D. Transforce is a highly acquisitive consolidator with an EV of $2.8bn and ~$350mm of liquidity (adjusted for recent Velocity Express acquisition). The 13D did not reveal much, but a research piece put out by RBC shortly thereafter was interesting to say the least: "We had the opportunity to speak to TFI's CEO regarding the 13D... It is TFI’s view that if the turn-around is successful (and the shares appreciate in value), then TFI will take profit and exit its stake. If however the turn-around is unsuccessful, TFI may look at acquiring VTNC outright... The TFI CEO made it very clear, however, that it is interested only in VTNC's Canadian operations and has no interest in running a U.S. LTL operation". TFI owns 1,763,478 VTNC shares (10.75%) and has been in the market buying aggressively. Insiders only own 4.7% of the Company. Chairman Richard McGraw had a 35.2% withheld / abstain vote last AGM, held on April 24 2012. Note that in 2013, the Toronto Stock Exchange is implementing new rules, which includes the adoption of a majority voting director resignation policy or explanation of why such policy has not been adopted. McGraw’s feet are to the fire here and with the potential for a >50% Withhold vote and forced resignation, he may want to look at implementing drastic shareholder-friendly actions real soon. Conclusion Competitors and an activist have used the depressed stock price, caused by temporary poor results out of only one segment, to establish toe-holds in the company. The Chairman is facing serious shareholder backlash and could potentially get voted out in three months. Management needs to show results on its turnaround strategy quickly or the Board needs to evaluate strategic alternatives. The market currently values the US LTL segment (62% of revenue) at zero. Shareholders have high torque to a potential turnaround, which could result in the stock appreciating 100% - 180% in the next twelve months. If the turnaround is unsuccessful, the company would be vulnerable to a hostile take-over by Transforce or a proxy fight in which the company would be restructured, both of which would unlock significant value leading to a higher stock price than current.
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