Move Logistics is transforming its business model. Photo / Supplied
Take one NZX-listed freight and logistics company with poor earnings growth, depreciating assets and underpriced services, stir in new industry professional management, adopt a winning strategy or two from competitor heavyweights like Mainfreight, and baste with a supply chain crisis.
With this turnaround recipe, what could possibly go wrong for Move Logistics?
Quite a bit, acknowledges Craigs Investment Partners in a new research paper - but it also believes the company, whose legacy entities go back to 1869, is "poised for a turnaround".
Craigs says while it's early days for Move's transformation strategy which will take several years to play out, "and while we acknowledge above average execution risks", new chief executive and executive director Chris Dunphy is off to a strong start.
Dunphy, an ex-Mainfreight executive, has recently bolstered his new senior leadership team with more appointments drawn from Mainfreight and other large industry competitors, says the report.
Following a $40 million recapitalisation, the company plans to change the operating model of its freight division from a traditional capital-intensive model where it owns depreciating trucks and leases appreciating property, to a Mainfreight-style model where it owns the property and drivers own the trucks.
Move is one of New Zealand's largest freight and logistics companies with revenue of more than $350m in FY21 and 3500-plus customers across its five divisions.
Previously called TIL Freighting - it listed in 2017 and was rebranded this year - the company has a poor track record of earnings growth, says Craigs.
Following a 90-day strategic review and the recent $40m capital raise, the company is implementing changes to increase margins, grow shareholder value and better position itself for growth over the five divisions.
"Fixing freight" is one focus.
Move operates a capital-intensive nationwide freight division marked by poor performance in recent years.
Unlike larger competitors it owned a large base of depreciating assets - around 250 of the 500 vehicles in its fleet - while leasing sub-optimal property.
Full truck load services, which make up around 80 per cent of freight revenue have been underpriced due to prior management's focus on revenue rather than margin, says Craigs.
Despite the freight division contributing around 48 per cent or $170m of FY21 group revenue, it accounted for only 27 per cent of ebitda and 7 per cent of total ebit.
Planned changes included replacing 150 employee drivers with owner-drivers. Efficiencies gained would include a cost saving of $6m a year "in the long run should Move successfully bring on an additional 150 drivers".
Twenty-eight owner-drivers had already been taken on, many from larger competitors. This suggested Move was on track to meet its medium-term goal of around 300 owner-drivers by the start of FY23.
Move was lifting rates for many of its existing larger customers, in some cases by up to 20 per cent.
"Move are willing to let larger customers go if margins are not sufficient and rate increases are not accepted," says Craigs.
The group's outdated legacy IT and transport management systems were being upgraded with $4m from the capital raise going towards this through FY22/23. Craigs expected the upgrades to lift efficiency, decrease paperwork and contribute to margin lifting.
"Overall, we expect freight ebitda margins to lift from around 10.5 per cent in FY21 to around 14.3 per cent by FY24. We have been more conservative than Move's management team (who expect ebitda margins to double by FY24)."
Other short-term changes include optimising routes, making better use of the fleet in the contract logistics (bulk liquids, warehousing and logistics) and rationalising the leasehold property portfolio. The group's current rent roll is around $25m a year across 40-odd properties. The goal is to own more properties.
Craigs said while Covid had disrupted FY22 trading and company earnings guidance was for a flat $1m, analysts expected earnings to improve to $5m in FY23 and to $8m in FY24 from a combination of new strategy measures.
So what are the hazards ahead?
Craigs says risks include labour shortages - New Zealand has a "severe" shortage of truck drivers; the impact of further Covid lockdowns which shrink national fuel demand; and holding on to customers while pushing through significant price increases.
Selling up to 250 trucks without flooding the market will also be a challenge, and conversely, sourcing 70 new leased trucks in a supply chain crunch and a pandemic could be challenging. Manufacturer lead times for new vehicles are currently 12-24 months. Volvo had closed its order book until 2024.
Inflation pressures, particularly on fuel and parts and finding suitable properties and reallocating current leases were also risks, along with management execution.
For Move's international division, container shipping line Maersk's intention to force local freight forwarders onto the spot market next year would create price uncertainty for customers. If spot shipping prices continued to track north, Move's costs could increase leading to margin erosion.
Medium-term priorities for Move were building greater competency in multi-modal transport including rail freight, coastal and trans-Tasman shipping, and hydrogen trucks.
Craigs says the rail network runs at capacity with freight controlled mainly by Mainfreight, Toll, Bascik and Coda. The first issue Move faces in shifting more freight onto rail is securing capacity in the network. It will also need specialised rail equipment.
More utilisation of rail was largely a medium to long-term focus. It was leasing suitable rail equipment which should provide some additional rail capabilities but Craigs did not expect the rail transition to provide significant financial efficiencies for the group in the next three to five years.
Craigs saw coastal and transtasman shipping as a future growth opportunity for Move.
On its intention to reduce its carbon footprint by leasing hydrogen-powered trucks, Craigs said a plus was that additional funding could be available from the Sustainable Infrastructure Fund.
"However expansion of project scale will largely be dictated by customers' willingness to pay a premium for the service in early years."
Move's NZX share price recently traded at $1.65. Craigs' 12-month price target is $2.20.
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