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Patriot Transportation (PATI) has been an underfollowed and underperforming liquids tank provider spin-out from FRPH in 2015. The corporate has struggled for the reason that spin-out with truck driver shortages which precipitated an lack of ability to service prospects. PATI presently trades at 2.6x EV/EBITDA and has extremely worthwhile actual property worth the corporate is making an attempt to unlock. The corporate is 83% owned by the Baker household and associates who have been beforehand buying shares round present costs as just lately as March.
Causes to Like
- PATI is extraordinarily low cost and buying and selling at distressed hearth sale costs
- PATI has traditionally traded within the 3-5x EV/EBITDA space, comps have been purchased within the 0.6-0.8x EV/Gross sales space throughout extra regular occasions
- Current Comcar chapter marks a distressed valuation that’s above the present EV/Gross sales for the corporate
- Mgmt does perceive the necessity for environment friendly capital allocation and the corporate issued a $Three particular dividend in January
- The corporate achieved optimistic EBIT throughout 3Q20 regardless of a 31% decline in revenues
- PATI is probably going over-depreciating property as evidenced by annual beneficial properties on sale of PP&E, as such utilizing simply e book tangible P&E implies giant margin of security from asset values
- Whereas cancelled resulting from COVID associated issues, PATI was on the verge of monetizing the land for its terminal in Tampa for $10MM. We predict the land is probably going nonetheless extremely worthwhile given the place it sits as soon as COVID normalizes and the corporate now has gotten metropolis approval for re-development.
- Mgmt is making an attempt to scale down into extra worthwhile contracts and outcomes are starting to bear fruit with income/mile rising ~5-6% y/y in 2Q20/3Q20
Causes for Warning
- There stays an acute structural truck driver shortage and COVID negatively impacted the faculties that prepare new industrial drivers
- Mgmt and the corporate have struggled to beat trade challenges which led to poor 2019 outcomes
- Mgmt has a want to opportunistically purchase firms although in the event that they fail to combine them properly it may destroy capital
- Oil market has been gentle and transportation revenues with it, whereas there was some restoration from elevated leisure demand quantity will seemingly not return till demand from commuters returns
- PATI has a scale drawback versus trade leaders
- Trucking is a extremely commoditized enterprise
- A chronic distressed cycle may trigger different trucking suppliers to develop into irrational on worth
- Baker Household/associates personal ~83% of the corporate and will pursue actions unfavorable to minority shareholders
- Buyer focus – 10 largest prospects have been 63% of income, Murphy USA was 19% of income
Patriot Transportation is the 13th largest tank truck/bulk provider within the US per Transport Matters Information working underneath Florida Rock & Tank Traces. PATI was initially spun out of FRPH in 2015 with the intention to make use of its pureplay tank truck fairness as a forex for rolling up the extremely fragmented tank truck phase of the transportation enterprise. As of 6/30/20 PATI had 455 drivers working 323 firm tractors, 19 proprietor/operated tractors, 452 trailers, and 18 terminals and 6 satellite tv for pc areas in Florida, Georgia, Alabama, and Tennessee.
86% of revenues are from petroleum hauling and 14% from dry bulk. In petroleum hauling PATI hauls gasoline from giant scale storage services to stores and in dry bulk hauling PATI hauls merchandise like cement, limestone, and varied industrial powders to finish person websites. Contracts are typically terminable upon 90-120 days discover nonetheless 9/10 prospects have been prospects for over 5 years.
Current Quarter Outcomes
Revenues declined 30.9% y/y to $19.0MM whereas EBITDA declined 5.1% y/y to $2.4MM. EBITDA margin improved 3.4pts y/y to 12.5%. In April volumes declined 35-40% y/y from pre-covid ranges and have now settled round 10-20% under regular. The corporate was too giant to qualify for CARES act advantages they usually closed their Wilmington North Carolina facility.
The tank transportation trade is very fragmented and the most important participant within the area is Kenan Benefit with $1.8B in revenues. The trade is commoditized and extremely cyclical with demand dictated by finish person demand for oil/petroleum merchandise on the liquids facet and industrial purposes on the dry bulk facet. Gas transportation is exceptionally cyclical given the massive swings in gasoline demand correlated to financial exercise whereas specialty chemical substances could also be extra insulated relying on the appliance.
The important thing driver of competitiveness for the trade is scale and regional working density. Sometimes there’s a fastened value per new terminal in a area and incremental quantity in the identical area is what drives profitability. Scale within the trade is very essential as it will probably present vital procurement benefits on gasoline prices, insurance coverage prices, and driver procurement. Driver shortages and rising insurance coverage prices stay two of the most important headwinds within the trade that can seemingly proceed to structurally destroy profitability for sub-scale gamers. Tank truck hauling has further challenges relative to regular trucking for drivers as the masses are doubtlessly extra harmful and require safer and extra skilled drivers. In the end as an trade larger driver shortages and insurance coverage charges must be handed by means of in elevated charges over time.
From the American Transportation Research Institute’s 2019 operational prices of trucking replace:
High 25 bulk tank carriers by 2019 income
Supply: Tank truckers News top 100
We method valuation from a number of angles: relative comp multiples, latest noticed acquisitions, estimated substitute worth based mostly on the observable used market, and tangible e book worth. All approaches suggest vital margin of security at present costs in our base case.
From a relative comp a number of it’s pretty clear PATI is buying and selling low cost although there are not any nice pureplay bulk tank carriers which might be publicly traded. AE and MMLP have small transportation companies (AE acquired CTL Transportation just lately from the Comcar BK and MMLP just lately acquired Martin Transportation). Normal truckload carriers common round 7.5x EV/EBITDA and 1.2x EV/Gross sales, each residence runs have been PATI to attain these multiples. PATI has traditionally traded extra within the 3-5x EV/EBITDA and 0.4-0.6x EV/Gross sales vary previous to COVID.
Supply: Bloomberg, self-created, Comcar BK Docket
Lately noticed comps point out nearer to a ~0.6x-0.8x Ev/Gross sales a number of pre-COVID whereas throughout post-COVID misery the bottom EV/Gross sales was from the acquisition of various segments of Comcar at 0.21x. Adams acquisition of CTL Transportation is probably going the closest latest bulk liquids provider knowledge level and EV/rev was 0.38x based mostly off annualized $2MM of income disclosed within the month-to-month working report for June.
PATI owns Three principal sources of identifiable asset worth: 323 vans/tractors, 452 tanker trailers, and 13 terminals unfold throughout Florida, Georgia, and Tennessee. New tractors can value over 110ok and new trailers value 30-50ok earlier than upgrades which may enhance the price of the tank to over 100ok. Per the American Trucking Analysis Institute, tractors common a couple of 7 12 months helpful life and trailers common 13 years. I assume the typical age of the tractor fleet is ~Four years with ~400ok miles based mostly on ~95ok income miles/truck pushed in FY19. That is in-line with what’s implied by collected depreciation of 62% of gross PP&E on the steadiness sheet as of 6/30 versus income tools depreciation curves of 7-10 years.
Supply: Company 10-K
Used tractors within the 300-500ok mileage space after 2015 are listed from between $20ok to $60ok per Commercial Truck Trader. Used tank trailers which have a 2010-2013 classic listing from $15k to $40k. We conservatively apply a $30ok/used tractor and a $25ok per used tanker trailer for our base case valuation.
The remaining sources of worth are the terminals owned by PATI. Those that soar out are the >100ok estimated tax evaluation properties per realtytrac with the crown jewel being the property at 6604 South Dale Mabry in Tampa Florida. This 25 acre property has been the goal of an over decade lengthy try at re-development however just lately previous to COVID there was interest in purchasing the property for $10MM for a retail redevelopment contingent on zoning approvals. The corporate acquired zoning approvals however the bidder dropped out in early September resulting from issues from COVID. We imagine the long-term worth of the re-development has not modified and the land is probably going nonetheless extremely worthwhile particularly since it’s situated in Florida, an anticipated beneficiary of COVID associated relocation exercise. Primarily based on this property alone we expect there’s seemingly no less than $10MM of asset worth within the land that might be unlocked sooner or later with doubtlessly one other $3-5MM from the opposite properties in Jacksonville, Panama Metropolis, Doraville, Chattanooga, and Knoxville.
PATI is extraordinarily low cost relative to comps throughout trucking and buying and selling at a reduction to even latest publicly seen valuations achieved within the Comcar chapter hearth sale. We predict Comcar might be a extremely conservative mark on the potential worth of the corporate and must be seen as an inexpensive ground from an EV/Gross sales valuation foundation. We predict there’s a cheap likelihood of upside and normalization to a 0.6x EV/gross sales a number of which suggests a possible worth of ~$20/sh. The corporate has been targeted on right-sizing the ship and was worthwhile in the latest quarter. Even from an asset foundation the corporate is buying and selling at under extremely conservative hearth sale ranges for tractor/trailers earlier than taking into consideration seemingly vital land worth in addition to precise enterprise worth for what was an EBIT optimistic enterprise on the peak of the pandemic in 2Q.
Disclosure: I’m/we’re lengthy PATI. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it. I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Extra disclosure: I/we personal shares of PATI. The above posted data just isn’t meant to be funding recommendation, please seek the advice of with an funding advisor and do your individual due diligence earlier than ANY funding. By no means is that this meant to be a advice to purchase or promote shares, securities, funds or ETFs talked about herein. Though I disclose when I’ve a protracted or quick place in a inventory underneath dialogue there is no such thing as a assure that I received’t shut a place with out subsequent notification.
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