Xpediator is a logistics group that helps companies transport goods within Eastern and Central Europe and also further afield from countries including China and the US. Today it has 15,000 customers ranging from giants such as Amazon to small, local firms in Romania. It is often able to do things more efficiently than even the biggest companies because it doesn’t operate its own truck fleet and therefore runs an asset light model. Turnover has already ballooned from £50.1m in 2015 to £179m in 2018 whilst profits have climbed five-fold from £1.3m to £7.2m.
Profits would have come in even higher last year but for the fact that the company beefed up its central team, with several new appointments including a new finance director, IT head and an M&A specialist alongside others, which added to its central costs. Xpediator’s 65-year old chief executive, Stephen Blyth, is obviously in a hurry to get even bigger and his unofficial strategy is to achieve sales of £500m in the next three or four years after which he wants to be busting £1bn sales in the following three. He also makes no secret of his belief that the group is absurdly under-rated on a historical price-earnings ratio of just 10.5x, reflected in his purchase of another 500,000 shares at 48p last month, taking his holding to 35.3m shares or 26.4% of the equity.
History
Xpediator is the brainchild of Blyth who set up the business 31 years ago. Some of the early investors came from Tibbet & Britten as has the recently recruited finance director. Old timers will recall T&B used to be quoted on the Full List before it was swallowed up by DHL (which in turn got swallowed up by Excel) but I don’t think it’s a role model for how Xpediator is now evolving. Blyth agrees.
The logistics sector has changed drastically since the mid-1990s and companies in the market are now faced with the dilemna of how to run things efficiently enough to survive. The internet has changed customer expectations with Amazon, Ebay and the like increasing the demand on packaging, warehousing and fulfillment with faster and more flexible deliveries, reduced shipping costs and, of course, safe delivery without damage to the package. Technology has enabled customers to receive instant updates on their delivery status through tracking systems and companies are fighting to keep up. In a competitive marketplace, after all, if you do not match pace you get left in the dust, says Blyth (casually throwing in the fact that he has signed an NDA with Amazon where it is working on the periphery to assist it in some of its logistics).
Blyth is a battered old veteran in the logistics sector. Qualified as an accountant in the early 80s, he cut his logistics teeth at Bleckmann, a transport supplier to the textile sector and a subsidiary of the Dutch Frans Maas group, where over a four year period he turned it around from substantial losses to substantial profits. That business was all about textile transport and in 1988 Blyth left to form Delamode (Xpediator’s original business) providing freight forwarding services to the textile sector, initially moving clothing from Romania to the UK for a variety of retailers. That was the original business but acquisitions have widened the scope of the group’s activities and the high growth in those means that textiles is now down to under 10% of sales.
In 2019, Xpediator’s sales rose 54% to £179m and adjusted profit rose by £4m to £7.2m. The business gives the impression of being a tightly focused logistics conglomerate organised across three divisions with operating profits (before central costs) breaking down as follows :
• Freight Forwarding (£3m);
• Warehousing and Logistics (£3m);
• Transport Services (£2.3m).
Freight Forwarding
Freight Forwarding is the original part, still operating as Delamode. The business started off transporting textiles from Romania into the UK and this is in many ways why its centre of gravity and largest markets are still the provision of consolidation services throughout Central and Eastern Europe including the Baltic and Balkan regions (with freight forwarding from 10 offices including in Romania, Lithuania and Bulgaria).
As Blyth explains, given the fragmented nature of freight in the textiles market, you lose money if you are transporting partial trailer loads and this is why early on the group developed export consolidation services to aggregate loads and increase efficiency and Blyth is now applying this to the transportation of other goods like flooring, machinery and household products. Nowadays Xpediator doesn’t run its own fleet of trucks but uses third parties to carry the loads and this means the business is asset light as it is essentially acting as a broker.
Loads are priced based on a combination of tonnage and cubic metres of volume and as is commonplace in the sector, Delamode operates under three models. “Groupage” - where the load is a mixture of a number of clients’ products consolidated onto one trailer for delivery to respective final destinations; “Full Trailer Load” - where the client contracts with the freight forwarder and requests movement of a substantial volume of cargo from a single location to a single destination; and “Part Loads,” which is used on occasions when it has undersold a groupage trailer.
Central to its operations is its bespoke Carrier Management System, says Blyth. This provides a database of 3,000 hauliers who meet the company’s certain criteria - insurance, routes, countries covered and rates, as well as equipment types (eg. does the vehicle have a tail lift). When a customer calls and asks for a quotation, Xpediator’s operational staff use the pool of suppliers to set up the shipment. As most of the stuff might be going overseas, Xpediator will often also use agents or associates to provide document delivery, deconsolidation and freight collection services to deliver the item to the destination.
Generally “closed book”
It might all sound simple but it can be fiendishly complex (especially if there are multiple clients per load) because several shippers may be used to transport to the final destination and there is a need to track inland transportation, prepare all the shipping and export documents (in some cases the shipper uses its own waybill), book cargo space and negotiate freight charges and to also handle cargo instances and file any insurance claims.
Almost all of the work is “closed book” so customers will get fixed, indexed prices for given volumes but don’t see Xpediator’s actual costs. Xpediator is paid a fixed rate for various services, such as a charge for storage of an item per day or for handling it. Closed book makes for higher margins compared to, say, Wincanton (WIN; 268p), which operates open book contracts. Last year overall the Freight forwarding division’s sales grew from £93.3m to £136.9m. Margin was 2.2% and should increase to 3% this year.
Last year Xpediator invested £1.5m on IT, says Blyth and he would like to spend more, especially looking to move one day towards a self serve model where he can enable customers to pick and choose their shippers online so he can reduce manual processing. Many small companies are circumscribed in their own ability to invest in this way and, using military jargon, this creates a target rich environment for acquisitions. Two in 2018 (of Benfleet and Anglia Forwarding) were responsible for reinforcing the group’s strengths in the division.
Roll-up acquisition strategy
Key drivers for doing deals are to grow scale and add complementary capabilities. Often Xpediator is buying businesses on a multiple of roughly 5x profits before tax, free of debt and cash and with a deferred consideration based on future performance. However, there have been hiccups - for example, Benfield suffered last year from a UK industry-wide fallout, which affected all shipments from China after tightened customs security checks. The European Commission argued that many exporters from China had been under-declaring the value of imported goods to pay lower duties and sales taxes. Customs duties in EU countries are a direct revenue for the bloc’s budget as they are collected by national authorities before being sent to Brussels. It could have blown up in his face but Blyth says his typical deal structure of deferred consideration meant that he was able to claw back most of his consideration on the acquisition. I described it as a bum deal but Blyth retorted saying it was a super deal as now that business is bouncing back as Benfleet is serving the Chinese clients who had been impacted via Xpediator’s agents in Greece.
E-fulfilment exposure
Within the Freight Forwarding business, Xpediator also owns Regional Express, which provides door-to-door freight forwarding services, warehousing and UK/EU tax and filing services to Amazon sellers in the US.
Alongside that, Xpediator has launched EShopWeDrop as a service to reduce the cost of delivering e-commerce purchases in countries such as Estonia, Lithuania, Albania and the UK, at extremely competitive prices. The EShopWeDrop service works in conjunction with customers like Amazon to deliver consolidated consignments to a central location from where they are then transported using its freight forwarding infrastructure to the destination country and then onto the final customer using a local logistics operator. For example, my wife recently wanted to order a set of light fittings from a US supplier, which rather bizarrely was offering the product on its US website at a third of the price to that in its store on the Kings Road. When their US office said they weren’t able to deliver into the UK directly, an obvious solution was to use EShopWeDrop. Similarly, the service appeals to overseas shoppers ordering products such as crash helmets, which are exempt from VAT in Britain but subject to tax in certain parts of the Baltics. Each local depot is run by franchisees and several new ones were opened last year, including Albania, Cyprus and the US.
Warehouse and Logistics margins rising
Alongside Freight Forwarding it has been natural for Xpediator to expand into warehousing and distribution for its customers in Romania and the UK, offering short to long term storage flexibility. This division is clearly the swing factor for the group as it is already growing fast. Last year operating margins soared from 5% to 8.4% and Blyth expects these to climb towards 10% this year as economies of scale kick in.
Whilst the UK economy might be in the doldrums, Romania is booming, particularly in the movement of machinery and electronics, helped by a strengthening economy. A key factor in the group’s success is to allocate 28,000 sq m of the space to warehousing pallets and running a Pall-Ex pallet network operation, which commenced in 2012. You might remember a certain Hilary Devey off BBC’s Dragons Den who originally set up Pall-Ex, a hub-to-hub pallet exchange in the UK.
Xpediator holds the master Pall-Ex franchise for Romania and has in turn recruited a number of franchisees who run the trucks. As Blyth explains, a pallet exchange function works by dividing a country or area among the members of the networks. A truck with a pallet of goods comes into his exchange and is unloaded within 16 minutes and then individual consignments are picked up by franchisees for onward delivery. 20% of the pallets never touch the ground and for each pallet that it accepts into the hub, it earns a revenue of Eu4.50 before paying a royalty to Pall-Ex. The beautiful aspect is that the facility is only one third capacity utilised at the current 50,000 pallets a month and with it only requiring, perhaps, an additional forklift to handle greater volumes, margins could soar.
Xpediator has now also acquired the Pall-Ex rights for Hungary and Moldova and is working on using the Pall-Ex network to target the e-commerce market by developing a national courier service in Romania.
Elsewhere in the UK, there are two warehouses at Braintree and Beckton with high bay pallet storage dedicated e-commerce fulfilment and garment storage including the management of returns for retailers (reverse logistics - with value added services such as removing dog hair from garments, ironing them and returning them to retailer shelves). There is also 40,000 sq m of warehousing facilities located within Southampton port (which came from the acquisition of ISL last year). As Blyth explains, before the deal, Xpediator was mostly about road haulage but ISL expanded its capabilities into sea freight and recently Xpediator has added port offices at Dover and Felixstowe and also full AEO status, which will permit its facilities to be used for potential post Brexit customs clearing work.
Fuel Card business
The final bit of Xpediator’s operation is Affinity, which offers a range of transport solutions services that support the activities of transport companies throughout CEE countries. Here the mainstay is running DKV fuel cards in Romania, which it has done for 16 years.
DKV is one of the largest operators in the independent fuel cards market and focuses on HGV commercial vehicle fleets. It operates pay-as-you-go international fuel cards, which enable fleets to purchase fuel at a weekly fixed price rather than the site pump price and the card is accepted in 65,000 sites in 42 European countries. Affinity targets mostly smaller clients whose HGV drivers might cross several countries and re-fuel along the way and as part of the service it makes VAT reclaims for its clients. It essentially earns a commission based upon fuel volumes and last year made a £2.3m profit on sales of £6.4m, a 38.6% segment margin.
Not a rag bag
When I first started to look at Xpediator it appeared to be a bit of a rag bag but there are obvious synergies across the various moving parts. Even on the Affinity side, some customers are already suppliers of haulage services elsewhere in the group and as a consequence Affinity can use the money it owes them as a credit against their fuel purchase, credit which they might not be able to secure elsewhere. Blyth adds that the plan now is to also sell 'captive lease' solutions - lease financing for vehicles organised by a regular lease company from which Xpediator will take a commission per sale.
Xpediator reports in sterling, with 40% of sales being Euro denominated. At the recent results statement, Blyth reported that trading was going very well and ahead of the same period last year. Analysts’ forecasts range between pretax profit of £8.1m and £8.6m, against £7.2m for 2018, raising hopes that something over £10m may be on the cards if Blyth can conclude another deal. The prospective PE on forecast earnings of 4.8p/5p is under 10. I am a buyer.