Xpediator: Zeus Capital’s visit to new Southampton hub

We have visited Xpediator plc (LON:XPD) new and expanded distribution centre (DC) in the UK Port of Southampton. We believe this is the largest bonded quayside facility in the UK – convenient for efficient handling of containers and freight. The facility is nearly fully operational, and XPD already has enough Peak Season shipments to fill the new space. A big part of our conversation with management was on costs and supply chain pressures. XPD is not immune and has lifted pay for many of its workers. That said, its freight forwarding model allows significant costs to be passed through to customers. Overall, the benefits of restructuring the Southampton DCs should offset cost pressures elsewhere. We are confident XPD can hit its guidance of PBT of >£8.5m for the full year, a c.20% improvement on 2020a. Our valuation is 85p.

Site visit takeaways – Xpediator has consolidated operations and expanded its key port-based DC from 260k sq. ft. to 460k sq. ft. Other features, such as a mezzanine floor system, have been added to provide more e-fulfilment activities. The facility is owned by AB Ports (ABP) but rented on a long lease to XPD. Fitout costs to XPD were c.£1.5m and were included in our estimates. The facility is bonded, allowing customers to manage VAT and duties for working capital. Shipments are mainly toys – this is a resilient storage and handling sub-sector, with good pricing support. The space is flexible, and operations can be semi-automated, for example using the latest wire-guided forklifts. Current trading is strong, with an early Peak Season build-up of stock by customers. Management expects utilisation to exceed 90% once the facility is fully online. On energy usage, the roof has solar panels and the landlord, ABP, is using the power for the warehouse and other port operations. Clearly costs and supply chain bottlenecks are a concern for everyone now. XPD, in common with many other DC operators, is seeing a shortage of warehouse workers and forklift drivers. HGV drivers are sub-contractors, and not a direct concern for management. Fortuitously, for XPD, the savings from restructuring of the Southampton DC network will offset cost pressures elsewhere in the business this year. Overall, XPD has deftly restructured much of its UK DC network, Southampton is a key asset. Generally, demand for UK storage space is strong, and this division should make a good contribution to Group profit this year.

Recent H1s and outlook – In mid-September, Xpediator reported strong H1 earnings with revenue up c.27% and adjusted PBT up c.74%. Revenue growth was healthy across all three divisions – Freight Forwarding, Warehousing & Logistics and Transport Solutions. XPD benefited from continuing strong shipment and pallet flows in the CEE region, extra UK customs work related to Brexit, a partial turnaround in UK warehousing, and more DKV-linked fuel cards activity. Profit increased in Freight Forwarding and Transport Solutions but was held back slightly in Warehousing & Logistics partly due to start-up costs with the new Southampton hub. On cash conversion, disruption in global supply chains and capacity shortages led to a working capital squeeze, but this should unwind soon. The outlook is positive. Full year guidance was maintained and indicates nearly 20% y-o-y growth in profit, and mostly organically generated. The stock has drifted recently; it is trading at a discount to the wider European logistics sector – on a 2021e PE of c.15.0x versus the group on 20x (a c.25% discount), and EV/EBITDA of 7x versus 10x (c.30%), with a dividend yield of 2.6% versus 2.0%. XPD is good value, costs are under control and organic growth is strong.

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