Speedy ($0SP:BU)

Company

Founded in 1998 in Plovdiv, Speedy (0SP:BU) is a Bulgarian package delivery company. In a little over a decade, it became the largest private package delivery company and the second largest postal service provider after the ex-monopoly Bulgarian Post. It was also the first Bulgarian delivery company to become ISO certified. The company operates mostly on the internal market – deliveries within the country – but in the last 5 years it has been working on expanding its operations in Romania and its international delivery service to Europe. In 2010, Speedy became part the DPD network – a European parcel delivery network with 800 distribution centers in 40 countries, 18,000 vehicles, 2.5 million deliveries daily, and 24,000 employees.

The types of services Speedy offers include:

  • Economy (2-day delivery)
  • Express (1-day delivery)
  • Super express (same-day delivery)
  • Cargo (>100 kg)
  • Pallet cargo (<600 kg)
  • Container (6-10 tons)
  • International delivery

 

Market

As of 2014Q1, Speedy has over 600 vehicles. Their average age is around 2.5 years. The company has approximately 27% of the delivery business in Bulgaria. Its largest competitor is Econt Express. But, it is important to note that so far they have approached competition intelligently and segmented the market instead of going to war. Econt focuses on individuals and smaller packages while Speedy caters to corporate clients and larger packages. This doesn’t mean there is no competition in the market. There are 118 delivery companies in Bulgaria. The top 5 – Speedy, DHL, Econt, InTime (UPS), MIBM – control 2/3 of the market and the top 15 – over 90%. A 5-firm concentration ratio of 67% classifies the market towards the moderately concentrated side of the spectrum, which is not bad for shareholders considering the reasonable behavior of the big participants.

To put these numbers in perspective, the latest report from the regulator of this space (with data for 2012, I believe) puts the total size of the Bulgarian postal services market at BGN 245 million, of which 161 million is courier services. It is also good to know that by 2013 the sector had fully recovered and reached its 2008 peak.

Although Speedy focuses on corporate clients, it has no significant exposure to any single client. No one accounts for more than 2-3% of revenue.

Speedy serves the Bulgarian market out of six distribution centers located strategically in major regional cities and 155 offices (as of year-end 2013).

Speedy Distribution NetworkThe large circles designate the six distribution centers in Sofia, Plovdiv, Stara Zagora, Burgas, Varna, and Veliko Tarnovo. Under this arrangement, the maximum distance between distribution centers is 250km, meaning trucks can cover it in 3 hours or at least 2 times daily.

 

Growth

Speedy is a fast-growing company. Over the past five years, on average book value has grown by more than 25% annually. Earnings been going up by 20% on average and have surpassed the 14% rate of growth in revenues. Management forecasts business to double over the next 6 years, which equates to a 12% annual growth rate (Investor.bg article in Bulgarian).

Management discusses four main sources of growth in annual reports:

  • Online sales – In the fallout from the crisis, online retail sales really picked up globally. Bulgarians have approached online retailers very cautiously, weary to expose their financial data on the internet. But this is changing fast. The sector is back to its pre-recession rate of growth of 15-20% annually.
  • Outsourced logistics – The economic slowdown also caused businesses to think seriously about optimization and cost-cutting.  Management has seen an increase in business coming from companies outsourcing their logistics function to Speedy and they believe this trend will continue.
  • International delivery – In recent years, Speedy has invested considerably in developing its Pallet One service. This is an express, door-to-door service for palletized shipments up to 1200kg that is offered both in Bulgaria and most of Europe. The partnership in the DPD network covers another aspect – packages up to 31.5kg – of expanding the company’s services internationally.
  • Romanian market – Early this year, Speedy entered an agreement to acquire the business of a Romanian package delivery company and apply its expertise from the Bulgarian market in developing its business in Romania as the two markets are very similar. The deal requires more attention and I will discuss it in detail in a follow-up post.

 

IPO & Valuation

Speedy went public in late 2012 at BGN 51.5, valuing the company at BGN 76m, which translates to an earnings yield of 10%. The dividend in 2012 was BGN 5m, for a dividend yield of 6.6%. It is worth mentioning that Speedy promised a 50-60% dividend payout at the IPO and has yet to break this promise.

As it turned out, these metrics were not enticing enough to place the planned 20% of the company with the public. Instead, the majority owner and CEO, Valeri Mektupchian, parted with a little less than 1% of the company.

This may startle those of you not familiar with frontier markets, but it is pretty characteristic of these smaller, illiquid, majority-owner-dominated markets. The Bulgarian market is pretty small – BGN 8 billion (~10% of GDP) – and stale since after the financial crisis. In an earlier post, I discussed some Economic Indicators for Bulgaria & Bulgaria Stock Exchange.

Although the IPO didn’t fly, the majority owner is gradually decreasing his stake. Currently, it is close to 94%. Also, last year, the company issued a share dividend, next to the ordinary dividend, which effectively tripled the number of shares outstanding. The adjusted IPO price is BGN 17.20.

Operating margins averaged 12.5% over the 6-year period 2008-2013, starting at 13% and improving to 16% as the company cut non-core business lines and related costs. Thanks to relatively low interest expenses and the low corporate tax rate most of the operating income flows to earnings for a net margin of 13%. These are pretty impressive margins for a delivery company. The average for the transportation industry in the US is around 3-3.5% net.

Over the past 6 years, Speedy has generated half its current market cap in free cash flow. But, this doesn’t capture the whole picture. In 2008, free cash flow was BGN 4m. Last year, it was BGN 13m. However, Speedy’s fleet forms the largest part of its capital assets and 30% of all assets. These vehicles are financed via capital leases. Adjusting free cash flow for lease payments, gives a more reasonable estimation of the cash that can go to owners of the business.

After this adjustment, Speedy has generated nearly BGN 25m in 6 years, of which over BGN 9m in 2013 only. Looking at the trend, it won’t be a stretch to say Speedy can easily generate BGN 11-12m, if it stays in place, for a free cash flow yield of ~11%.

Factoring in the growth prospects discussed above (and further in a coming article) and management’s estimates of doubling revenues over the next six years, free cash flow could more than double over this period. According to the CEO’s promise to pay 50% of earnings out, this 12% growth should come on top of a 4-5% dividend yield. Assuming no multiple expansion, the return over the holding period should be 16-17% per year.

On top of this, you may want to consider improved efficiencies (from eliminating non-core services and using more contractors), which would drive free cash flow to grow faster than the revenue growth rate. Historically, earnings have grown 30% faster than revenues. If we take this figure, because it is more stable than cash flows, then the growth rate of free cash flow should come at 15-16% annually, bringing the total return to an impressive 20%.

 

Risks

You all know that you have to do your homework when reading others’ opinions on companies and, I am sure, you are much more conscious of this when the company trades on a frontier market. All risks you know of apply here, plus a few more. You can read on these risks. For those of you, who haven’t scratched the idea outright, I will go over the one company risk that bothers me the most and I haven’t found a satisfactory explanation for, yet.

In an effort to increase efficiency, Speedy encourages its employees, through a loyalty program, to purchase their vehicle and become their own business unit. As of 2014Q1, sub-contractors account for 52% of the delivery workforce.

Since leasing and maintaining vehicles, and paying employees and gas are the largest expenses for a delivery company, this should result in considerable decreases in these expenses and a similar, but hopefully smaller, increase in payments to sub-contractors. This is not what I am seeing at Speedy.

Payments to sub-contractors increased by 50% in 2013, but there was no material decrease in any of the corresponding accounts. EBITDA margins were nearly identical in both years. It is possible that, to support sales growth, expenses for both own fleet and for sub-contractors increased. But, it is also possible that sub-contracting is not that more efficient a way of doing business. In addition, more sub-contractors means more opportunities to get creative with accounting, have related party transactions, and even commit fraud.

I put this as a yellow flag. It is something I will keep an eye on to see how the situation develops the future.

 

Conclusion

I like Speedy. It’s a leading company in a growing, competitive and somewhat concentrated industry. Management appears honest and capable. The company has good prospects. At the current price of BGN 23, the stock could yield 15-20% annually over a long period. But before placing a bid, I would like to finish up my research of the pending acquisitions and the related capital raise.

More about this in the next post.

 

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