WFS – Au revoir.
Please find our unchanged analysis here.
Cargo handling is a highly cyclical industry. While WFS had a good pandemic, we may well be back looking at this business in the future, as generating sufficient Free Cash Flow remains a challenge. We have recently put WFS on the shelf and for now, we are saying goodbye.
A profitable trade:
- We have earned 9.8% in the 11-months we held the position, having entered the trade somewhat late in March 2021 @96.5c/€.
- Given a decent carry, we were happy to await the refinancing even as the bonds approached par.
Short-term Outlook:
- Cargo handling is tough industry to make money in but the short-term outlook is good.
- Free cash flow generation at WFS has never been very strong.
- The Pro Forma figures in the OM have levered FCF of only €2.7m in the LTM period to Sep-21 (using PF further Adjusted EBITDA of €153.3m). Net debt is a hefty €956m. The post refi PF cap structure is 5.2x levered at the SS level and 6.3x overall (using PF Adjusted EBITDA to Dec-21 of €181m).
- The ground handling portion of the air cargo industry suffers from both high fixed costs and cyclicality. The business is both highly labour intensive and unionised. If there is a downturn in economic activity in air cargo (traditionally a highly cyclical industry) at a time where there are still inflationary pressures, we will be looking at WFS again.
- However, there are no immediate cash issues. The capital structure has no meaningful maturities or amortisations before 2027. WFS also has a €160m RCF (currently only €27m of LCs outstanding) and €178m in cash on hand. The remaining €43m in PSP (covid support) loans have a 10-year maturity.
- Cargo handling demand remains strong and industry trends are currently supportive.
- WFS prospered during lockdown benefitting from increased demand for air cargo and accelerating the turnaround programme instigated by Cerberus post completion of the secondary buyout in 2018. Recently WFS has also made a couple of significant acquisitions; Mercury (EV €217m), the largest cargo handler at LAX and Pinnacle (EV 75m) Cargo handling and trucking specialist in the US.
Positioning:
- We receive back our 5% of NAV at a time when we are looking for new opportunities to allocate cash. We are satisfied with an annualised return of 10.5% on the position.
- We see WFS as a potential candidate for us in the future. Competition is fierce and Cerberus will continue to roll up competitors using cash on hand. We like the strong positions WFS holds at key airports and the ownership of key infrastructure assets in the same places. So, it’s more a case of “au revoir” than “adieu”
We are always happy to hear your views on this.
Regards
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055