WFS – Flying away to the shelf
All,
Please find our updated analysis here.
WFS has benefitted from an upsurge in cargo demand during covid, although the weak position of its ground handling business means 2021 will still be marginally down on its 2019 performance. Notwithstanding this, the company is in good shape liquidity wise and with the bonds trading near par, we are returning it to the shelf. For the future, WFS struggles to generate sufficient free cash flow to cover interest, and it still needs to grow into its capital structure. The options for margin enhancement are limited and future improvement in free cash flow will be top-line driven. We may yet be back looking at WFS in the future. We still hold the SSNs for 5% of NAV and will be disposing of this holding.
Still struggling to cover cash interest:
- WFS did not cover its interest from free cash flow in 2018-2020. Absent the working capital tailwind enjoyed this year, we expect the issue will return in 2022.
- To grow into its capital structure, WFS will need to maintain margins as the top line grows. The industry is highly competitive and management acknowledged on the call that productivity improvements would be behind further improvements in gross margin.
Q321 – Cargo near fully recovered, passenger services weak but improving quickly:
- Revenue of €354.4m was 2% down on Q319 but up 40% in 2020. Cargo rebounded quickly in 2021 and is now only 2% below its 2019 level. Covid restrictions were in place for longer on passenger traffic, so it has taken ground handling longer to get back into shape. Revenue is still 22% beneath 2019 levels, but we expect it will recover fully by the end of 2022.
- The underlying Field margin has recovered to pre Covid levels at around 17.5%, whilst the underlying EBITDA margin is still lagging at 9.8% vs 10.6%. There has been pressure on labour costs due to the difficulty in hiring additional staff. This should flatten in 2022. LTM Adjusted EBITDA (on a pre-IFRS 16 basis) is €115.8, pro forma for acquisitions (€12.4m) and cost-saving initiatives (€2.7m), it rises to €131m and €135m when including synergies and others. PF for the Pinnacle acquisition. This equates to a 10.2% margin, still below the near 11% achieved in 2018. Increases from here are going to be modest and productivity-driven due to the level of competition in the industry.
- In 2020 OCF was boosted by the unwinding of working capital positions. Covid aid from governments has helped manage working capital levels in 2021. In Q3 PSP grants (Covid support) added €19m to OCF. This situation will reverse in 2022, and we expect WC outflows of €100m over the next four quarters. Right now, the company can afford it.
Back on the acquisition trail:
- In Q3 WFS paid €75m for Pinnacle Logistics, an e-commerce focused cargo business based in Fort Worth in the US. The asset was acquired using cash on hand, a vote of confidence in the future. WFS is now the largest external cargo handler for Amazon in the US. There will be synergies from integrating facilities but also scale will add operating efficiencies.
Positioning:
- We are long the SSNs for 5% of NAV. We had worked out that the company had sufficient liquidity to ride the Covid storm. The cargo business had a successful pandemic, and ground handling is now recovering. With the bonds near par, the upside is limited. The structural issues around free cash flow generation will come back into focus now the world is returning to normal.
- We will be disposing of our position and will place WFS on the shelf unless you would like us to keep coverage. Please let us know if so.
As always happy to exchange ideas on the name.
Regards
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055