We prudently cut our FY19 and FY20 EBIT forecasts for Eddie Stobart Logistics (ESL) by 5% and 6% respectively post the H1 trading update highlighting solid revenue growth, but EBIT at the low end of management expectations and a 4% downward revision to the last reported adjusted EBIT. Despite this, our forecast FY19 EBIT margin remains at the top end of logistics peers and, even on our revised numbers, the stock is trading at a significant discount to peers, offering an attractive c 9% dividend yield.
The H1 trading update shows that revenue growth continues to be sustained (+25% y-o-y, of which +8% organic), but pressure on margins persists, with H1 EBIT at the low end of management expectations due to slower productivity improvements in Contract Logistics and Warehousing and the short-term negative impact of exiting a problematic contract on the transport network’s operational efficiency. In addition, a 4% negative revision to FY18 adjusted EBIT was announced. However, ESL expects to deliver full-year results in line with the board’s expectations, not least because historically volumes have been weighted towards the second half. We have prudently reduced our FY19 and FY20 EBIT forecasts by 5% and 6% respectively on the assumption that EBIT margins will remain stable vs FY18 (we previously expected a small increase).
We believe that the market in which ESL operates continues to provide long-term growth opportunities. The trend for companies outsourcing their logistics is wellestablished and should continue to provide organic growth opportunities for the company. In addition, the shift to e-commerce provides strong growth opportunities for ESL, as it has developed a solid track record in reorganising the logistics of traditional retailers as a result of its e-commerce capabilities. We believe that H119 confirmed these trends, with 8% organic revenue growth.
Even on our revised down forecasts, we believe the valuation is attractive. The FY19 P/E of c 6x is at a large discount to other logistics companies (11–21x for UK/EU companies). The dividend yield of c 9% stands out compared with other UK small-caps and logistics companies. The dividend is based on a payout ratio of c 50%, broadly in line with the levels of other UK and EU logistics companies. While the overhang risk related to the 22.89% stake of Woodford Investment Management may continue to weigh on the share price, we see room for a significant re-rating if/once this is removed. Our DCF-based valuation reduces to 154p/share (from 175p/share), still implying material upside.