On the road to exceptional earnings growth

  • First half adjusted pre-tax profit up 74% to £3.6m on revenue up 27% to £126.6m.
  • Freight forwarding is a key driver of growth.
  • Annual pre-tax profits are expected to exceed £8.5m, up from £7.2m in 2020.

At the end of June, the Braintree-based international freight management services group Xpediator (XPD: 67p) raised the full year pre-tax profit forecast by more than 10% to £8.5m. Earnings risk is still biased to the upside as directors need only repeat the performance of the second half of last year to meet forecasts.

In the first half, Xpediator’s freight forwarder operating profit (pre-central overhead) jumped 54% to £4.1m on the back of a 28% rise in revenue to £101m, boosted by more mature businesses in Lithuania and Bulgaria, higher shipping rates (which are passed on in full to customers), and additional UK customer clearance work for post-Brexit customers.

The group also benefited from a £0.4m increase in operating profit contribution from its Affinity brand which provides bundled fuel and toll cards and transport services (ferry bookings, insurance and VAT refunds) to 2,000 Eastern European hauliers and 14,500 trucks. There was good news from Xpediator’s Pall-Ex (Romania) franchise, a growing palletized freight distribution network offering overnight delivery, which moves 78,000 pallets of freight each month, up from 67,000 in the first half of 2020. Warehousing business in Romania is also robust, operating profit from this business increased by 60% and could reach £0.6m for the full year.

Admittedly, the start-up costs of Xpediator’s new 200,000 square foot facility in Southampton proved to be a drag and meant that operating profit for the logistics and warehousing business fell by a third in total to £0.4m, but the pipeline is strong and the seasonality of the business supports a second-half rebound. Importantly, the building up of the first half working capital – net cash of £6.7m reversed to net debt of £1.6m – is unfolding. The negative movement reflects an increase in advance payments from suppliers to secure drivers and trucks, increased freight rates, delays in customer payments related to the acceptance of Brexit-related charges and a change in the operational system at the within the financing of freight transport in the United Kingdom. Cenkos Securities received net cash of £3 million at the end of the year.

I initiated coverage at 45p (Alpha Report: Enjoy a Brexit winner”, February 19, 2021), and the share price nearly hit my 85p target after the admins raised the forecast 11 days after my last update (‘Ready for a major earnings beat”, June 14, 2021). The decline since July is exaggerated. Priced at 10 times operating profit estimates to the company’s valuation, which represents a 37% discount to industry peers, the shares are pricing a buy.

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