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Treasure Chest: Silk Logistics

Treasure Chest | Sep 28 2023


FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea is Silk Logistics.

By Rudi Filapek-Vandyck, Editor

Whose Idea Is It?

Analysts at Moelis

The subject:

Silk Logistics Holdings ((SLH))

More info:

Silk Logistics Holdings IPO'd in mid-2021 but outside of the two rallies that temporarily catapulted its share price back to $2.50, the experience hasn't been a positive one for shareholders.

Post financial result and dividend payment in February this year, the shares have continued to slide downwards and are now trading near their lowest level as a public company, for a face value loss of -30%, ex dividends.

Nothing untoward has come out of the company's financial updates in either February or August, with management proudly announcing $65.8m in new business wins for FY23 plus a further $9m to start the new financial year on the front foot in July.

Maybe the market cap of $138m and a rather tepid daily volume in shares traded, on top of the limited time as a publicly listed entity, explain why the shares are not receiving a lot of attention from investors? After all, low volumes generally combined with subdued sentiment across the board have meant that small cap companies in particular are doing it tough in 2023.

The two brokers in FNArena's daily monitoring that cover the company remain of the view that Silk Logistics deserves to be treated more favourably. Shaw and Partners recently switched to a new analyst who sliced his price target to $3 but kept the Buy rating. Stockbroker Morgans has a target of $3.20, also accompanied by a Buy rating.

Part of the problem seems to be that Silk Logistics remains at the mercy of general economic conditions and here the outlook for the next 6-9 months remains highly uncertain, with most forecasters assuming momentum is most likely to decelerate before the local economy can revert back to a faster pace of growth later in 2024.

It appears this scenario also forms the basis for Moelis initiating coverage on the company today with a Buy rating and $2.75 price target. Assuming economic growth picks up sometime next year, Silk Logistics should enjoy an uplift in its own operational statistics. Or to formulate this scenario in the Moelis' way: as the economy starts to improve, consumption picks up, lifting container volume growth, and with very low warehouse vacancy, this positions Silk Logistics well.

As the shares are trading well below even Moelis's price target, the reward for patient investors can be "significant".

Silk Logistics offers a fully integrated service from picking up goods at Australia's major ports to offloading at customer's distribution centres. It's what is called in your typical financial lingo an "integrated, port-to-door, landside logistics services provider", with national coverage.

Moelis argues the suite of blue-chip, long-term contracted customers representing diversified products and end markets virtually guarantees Silk Logistics relatively stable revenues and thus lesser exposure to the vagaries of economic cycles. No less than 93% of FY23 revenue was derived from existing customers and 74% of this revenue came from contracted customers with tenure of more than four years, Moelis highlights.

The broker adds investors should equally not worry about customer concentration risk, with the top 10 contributing 32% of group revenue and no individual customer exceeding 5% of revenue contribution (as at FY21 end).

Silk Logistics came to life through a merger of three companies in 2008 and has remained active as a purchaser of assets. Last year saw two acquisitions, thus far 2023 has sen one: the acquisition of Secon Freight Logistics, which adds to the overall bulks capacity.

Even excluding further purchases, all three analysts see a strong growth outlook for the company ahead, post the economic dip that is presenting itself in the short term. Once the bulk of the RBA rate hikes has made its impact on the local economy, consumption starts picking up again, leading to higher warehouse demand, and a "normalisation" of import volumes, so the investment thesis goes.

Moelis is projecting more than 14% CAGR between FY23-25 and 12.8% for FY23-26. Forecast increases in shareholder dividends are even greater; 23.6% and 18.9% respectively.

Thus far, however, the market is not paying much attention.

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