What if I told you that you could buy a trucking and logistics brokerage company at 5-6x EBITDA, with a revenue CAGR of about 20% for the next 5 years, and top-notch unit economics and management, you’d buy it in a heartbeat right?
Time to pull out your metaphorical chequebook.
Company overview
Titanium Transportation is a trucking and logistics company based in Bolton, Canada and trading on the TSX Venture Exchange. It is close to being one of the top 10 trucking companies in Canada, and operates in the Less Than Truckload (LTL) business, delivering large amounts of cargo across Canada and the United States.
The company has two segments:
_Trucking: your basic LTL trucking business. 65% of revenue is cross-country (US-CA) with the rest within Canada. Fuel surcharges are baked into 1+ year contracts with a wide variety of clients. Similar companies include Transforce Transportation, Mullen Group, Schneider National and many many others. The company grows this segment through M&A like the recent acquisition of ITS.
_Logistics: the logistics brokerage business allows truckers to be linked with companies who need to transport goods. Essentially instead of having to call around every trucking company to get rates, you just ask a broker to do that for you, same on the trucking company’s side, you get business through the broker and pay a fee. This segment is new and is growing very rapidly through the expansion of new offices across the United States, but more on that later.
Investment thesis:
Expansion of the logistics business: in 2019 the management team started growing its logistics segment after realizing that there was a significant opportunity in the US market. Here’s a recap of the opportunity:
Management assessed that they can open 10 offices in the US. It can’t be more because after a certain point you cannibalize yourself geographically
Opening an office costs $150k, and according to the lower bound of management’s guidance, an office can generate $31.5M CAD (yes you heard that right). Using the historical margin range (EBITDA margins tend to be a bit volatile with freight rates and demand) of 7% EBITDA margin, this gives us $2.2M of EBITDA per office
That leads to a stellar 1,470% Return on Invested Capital
An office takes about 3-6 months to be up and running at the above run rate, and management can realistically reach their limit of 10 US offices by 2024 (stabilized)
This is approximately how much value this segment alone will create. Essentially on 2024 numbers, you can get one of the largest trucking companies in Canada for free
Strong management team with high insider ownership and a focus on technology: management teams are always a key part of any good investment and this one is not lacking. The company is led by CEO Ted Daniel who is the co-founder of Titanium, Alex Fu the CFO, and Marilyn Daniel as COO who has extensive experience in trucking and is a member of the board of the Ontario Trucking Association. Why are they a positive
Insider ownership stands at around 37%, so incentives are properly aligned
The company is still founder-led
The CEO has a degree from Western University in Software Engineering which gives him an edge when it comes to technology. It’s one of the rare companies with a dedicated tech team that builds and integrates back-office systems to automate most tasks, drive productivity upwards and make sure safety is on point. It serves an important purpose in their M&A strategy (see my next point)
The CEO also has a background in corporate restructuring, another key part of the M&A strategy
The management team is advised by Lu Galasso, the majority shareholder, who has an extensive and impressive track record in private equity, providing this fairly small company with great perspectives on capital allocation
Simple and effective M&A strategy: outside of logistics this has been the key growth driver for the company and its trucking segment. Titanium has completed 11 acquisitions in the past 10 years, including the more recent ITS acquisition, a substantially larger one. This is the strategy:
Step 1: identify a trucking company with a strong asset base, good and loyal drivers, good client relationships but outdated methods, a back-office dragging it unprofitable, and low levels of intangibles
Step 2: acquire the company. Congratulations you’re now the proud owner of a fledgling trucking business that’s barely profitable, thankfully you didn’t pay much for it
Step 3: time to re-organize. Ted Daniels the CEO has a background in restructuring and puts it to good use. You use your internal tech team and slash 80% of the back office (management guidance). Goodbye outdated room full of agents waiting on the phone all day to dispatch everyone manually, now it’s tracking software, CRMs and custom-made tools.
Step 4: with 80% of the back-office costs out and a healthy and happy client and driver base, it’s time to reap the benefits. You’re now the proud owner of a well-run trucking business
The ITS acquisition was of significant size ($60.5M) and required issuing shares. Management does not like doing this (they’re some of the largest shareholders after all) but thought this opportunity was worth it. I like the deal but they even admitted that it might have been too big and are now focused on smaller tuck-ins which we see as a great thing
Valuation:
I will just walk you through some of the key assumptions. Now bear in mind in my valuation I don’t try to get the 1yr results perfect, that’s what the sell-side is for, I focus on the long-term picture so bear with me if they’re not exact
Logistics revenue: $31.5M per office reaching 10 offices by the fiscal year 2023, and by 2025 $35M per office with the office count flat. The reason being that by then management will focus on optimizing those offices after 3 years of growth focus
Trucking revenue: ITS numbers included (already announced) with a $20M acquisition in 2023 that I assume they paid 5x EBITDA for pre-synergies. Organic growth for trucking at 2% (inflation essentially) since I don’t want to make a bet on freight rates
7% logistics EBITDA margins and 15% trucking margins, in line with historical and peers
75% conversion between EBITDA and Cashflow from Operations, 2% of total revenue for Capex and 8c per share in dividends, all in line with management guidance and historicals
Multiple: 8x EBITDA for the logistics segment (low end) and 5x EBITDA for the trucking segment (low end). See the comps table below
The end result:
1yr target (on 2022 numbers): $4.01, a 38% discount to current price
5yr target: $7.37, a 153% discount to current price
See the short model below
Conclusion
This is a very large personal position for me for a reason. This company not only has some of the best unit economics, management and strategy in the business but it’s also priced like the bottom tier of trucking companies despite having a thriving and fast-growing logistics segment. The stock had quite a run down recently which had nothing to do with management’s execution but the overall macro environment (strong correlation to freight rates and trucking indices).
This is I believe a rare opportunity that will get priced in a much more fair way once liquidity comes back to the markets in September.
If you like what I put out don’t hesitate to share it, it helps tremendously. I am also available on Twitter by DM if you have any questions or if you have a different view of this company
Disclaimer:
This is not investment advice, this is for information purposes. Make decisions using your own assessments and do not rely on this document as a basis for investment decisions.
I really like the way you write your analysis. Are you still holding this? seems pretty cheap isn't