Xpediator “is highly investible in our view” says Zeus

Xpediator plc (LON:XPD) has announced strong earnings for 2021a, beating our PBT estimate. Revenue was up 34% at c.£297m and adjusted PBT was up 25% to £9.1m. PBT was c.4% ahead of our forecast for £8.75m. Trading was healthy across-the-board but particularly in freight forwarding in the Baltics, and with increased UK-related customs clearance work. The Pall-Ex freight network in Romania grew well, and fuel card activity continued to recover in the Balkans. The weaker spot was cash. Continuing the trend in H1, and as with many logistics operators, XPD paid higher advanced supplier payments to lock-in future freight capacity. That said, we predict a return to a net cash position this year as these prepayments unwind. Current trading has been positive, with January and February ahead of management expectations. March was in-line despite Russia’s invasion of Ukraine. Nonetheless, we are cautious on the outlook for the year, mindful of potential ongoing disruption in CEE markets, and general cost headwinds. Our expectations for growth in 2022e were already prudent; the profit beat for 2021a shows that the growth run-rate for the Group is higher than we expected, and costs more flexible. Hence, for 2022e, we continue to estimate PBT at c.£9m (i.e., about flat y-o-y). Recent Board changes require repair, but we note that key leaders in the business remain in post.

CEE market exposure is inherently positive for XPD and investors despite current disruption, offering higher growth prospects, strong secular supply chain trends with nearshoring, and access to low-cost freight capacity. The Group is resilient and flexible, with unique knowledge and skills in CEE and UK logistics markets. XPD is highly investible, in our view. Our DCF-based valuation remains 85p, indicating good potential upside.

Strong 2021 trading – Group revenue increased by 34% to £296.6m (Zeus: £297.4m). Freight Forwarding revenue was healthy, driven by growth in CEE markets, freight volumes generally, and an uplift from UK customs clearance work. Notably, Lithuania and Bulgaria forwarding units continued to outperform. Pall-Ex Romania, the franchised pallet freight network, contributed to positive trading. Transport Support Services, which provides bundled fuel and toll cards alongside financial and support services for hauliers in Southern Europe, has continued to recover with increased freight movements. Adjusted PBT increased by 25% to £9.1m (Zeus: £8.75m, c.4% beat), the margin was squeezed slightly (3.1% from 3.6%) due to higher forwarding revenues in the mix but (obviously) absolute profit was up sharply (i.e., by £1.9m). Adjusted basic EPS was 3.68p (2020a: 3.84p, Zeus: in-line). The total dividend was 1.1p (Zeus: 1.7p) – weaker reflecting the deteriorating cash position. Net debt increased to £ (4.8) m (June 2021a: £ (1.6) m) due to advanced supplier payments, and some delays in collecting UK receivables relating to implementation of a new freight forwarding system in the UK. Overall, XPD reported a strong 2021a despite the temporary headwinds with cash balances.

Outlook, Zeus estimates and valuation – On 25 March, XPD announced two resignations from the Board. Mark Whiteling, non-executive chairman and Stephen Blyth, founder, and deputy chairman, departed. However, key leaders and managers remain with the business, and we expect to hear about the re-build in the coming months. On disruption with the Russia-Ukraine war, trade lanes into Russia and Ukraine are a relatively small part of XPD’s business but these are disrupted. There is also a risk of wider disruption to CEE trade due to the war, but the Group is confident reductions in freight forwarding volumes can be made up elsewhere in Europe. Also, the UK business is more robust than in recent years. Overall, management states that they remain “well placed” to deliver solid earnings this year. Acquisitions could form part of the growth story, and an improvement in cash may trigger a special dividend payment. Our expectations for growth in 2022e were already prudent; the profit beat for 2021a shows that run-rate growth for the Group is higher than we expected, and costs more flexible. Hence, for 2022e, we continue to estimate PBT at c.£9m (i.e., about flat y-o-y). A detailed plan to improve cash management is in place and we forecast a return to a small net cash position by year-end. Xpediator is trading on a forward PE of 12.3x vs. the sector on 15.6x, a 21% discount. Our DCF-based valuation remains 85p, indicating good potential upside.

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