Clipper Logistics (OTCPK:CLPLF) is a medium-cap London-listed logistics operator in the U.K. I mentioned it in passing as having potential Brexit-related upside in my Seeking Alpha piece Brexit: A Ticking Time Bomb For British Stocks, and less than two months later, its shares are up from 299 to 424p, a 42% increase. I think it thus merits further analysis at this point as it is not previously covered on Seeking Alpha.
Clipper Logistics is a British Warehousing and Logistics Play
Clipper position themselves as “retail logistics experts”.
Founded in 1992, the company has grown to cover 46 sites, with 10 million square feet of warehousing space and a fleet of over 300 vehicles. It is headquartered in the north of England, and the British Isles remain its key market, but it also has sites in Continental Europe, including multiple sites in Germany and one in Poland.
It offers a full end-to-end e-commerce service, handling warehousing, distribution, returns, stocktaking and such like. It also offers warehousing and logistics for clients outside the e-commerce arena, such as the supermarket Morrisons (OTCPK:MRWSF, OTCPK:MRWSY) and the U.K. health service.
The Business Model Matches the Moment
I think one of the reasons distribution businesses can make an attractive investment for retail investors is that it is fairly easy to understand the business model. The barriers to entry for basic logistics are relatively low, which acts as a downward force on profit margins in the long term, but it still can be a decently profitable business though cyclical for some product lines.
As logistics operations get bigger, I think they can move from what is a heavily commoditized, price-based business to a more sustainable position where increased switching costs for large customers make higher margins possible. The key to this is offering a one-stop shop for customers which covers a large geographic area, then finding the right customers and growing with them (the same could be said for many business areas, but that does not diminish its application to logistics).
The rise in e-commerce, with ever-sharpening customer expectations about delivery times and complex supply chains with rapid stock rotation (as for example in “fast fashion”), has increased the need for such logistics markedly. So, Clipper Logistics has a business model which allows it to offer a vital service to a rapidly growing segment of the economy.
Additionally, outsourced logistics remains attractive. Sure, Amazon (AMZN) is the key e-commerce player in the U.K., and globally, it has made big moves to run its own logistics, investing in its own airline as an example. But the e-commerce marketplace is much bigger than Amazon. Amazon can build its own logistics arm as much as it wants, but there will remain a sizeable opportunity servicing non-Amazon e-commerce companies. In fact, Amazon is a client.
Source: company results presentation
Clipper is focused on long-term contracts with sizeable clients, with typical contract life between three and ten years. Its five biggest clients represent less than 15% of its EBITA, so it is not over-exposed to a heavy concentration of clients. It is difficult for now to take a firm view on whether the European operations will be more or less successful than those in the U.K. They do offer a long-term growth story for the company outside its home market.
Logistics is 84% of group revenue, of which two-thirds is e-commerce fulfilment, which grew 18.4% last year, and the remaining third is more general fulfilment, which declined 1.1% last year. This underlines the attractiveness of the company’s focus on its growing e-commerce business.
16% of group revenue is generated from a chain of new and used commercial vehicle dealerships. I don’t see this as a strategic asset.
Clipper is a Well-Run Operation
The company’s founder remains as its executive chairman. Its model is asset light and cash generative.
The company has put in a series of strong financial performances in recent years.
Source: company results presentation
This has translated into decent dividend growth since its 2014 flotation. However, its most recent year saw a flat dividend. The company didn’t provide substantive discussion of this in its results, although did say that the payout was in line with its dividend policy, although I don’t think that policy is well-articulated: it wasn’t explained in the most recent full set of accounts, for example.
Chart compiled by author using data from company annual reports
The company’s balance sheet also shows little debt aside from trade payables and lease liabilities.
Source: company final results
Net debt in the final results to the end of April published this month showed net debt was just over 1x EBITDA.
So, overall, this is a well-run business with a good business model and good timing, able to produce profitable growth on a consistent basis.
Valuing Clipper Logistics
The company is trading at 30 times earnings, which I regard as expensive even for a quality logistics business. Revenue and earnings growth look set to continue, given the company’s impressive track record to date.
Dividend yield of 2.3% is okay but means that an investment in Clipper at the current price is more about its growth prospects than yield. After the strong run-up in the past couple of months, I think the shares are due a breather, so see limited upside potential in the short term.
Conclusion: Clipper Logistics is Attractive, But the Share Price is not Good Value
This company has a great story, and story stocks do their own thing – if the tech bull run continues, it may lift Clipper’s boat further with it.
The company is attractive and is a good indirect play on U.K. e-commerce. However, on their fundamentals, the shares look fully valued in the short term at this point – at this stage, I think short-term upside is only about stock market momentum.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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