Asia Securities says Expolanka exit offer generates sizable premium to fair value

Asia Securities said yesterday the exit offer on Expolanka Holdings Plc to minority shareholders generates a sizable premium to our estimated fair value for the Company. 

In its latest Sri Lanka equity update focusing on the logistics sector, Asia Securities said EXPO’s share price witnessed strong gains in 2021 and 2022, in line with the company’s record performance.

“The share price, however, has continued to decline in the backdrop of a normalising freight industry post the COVID-19 pandemic. We view the voluntary exit offer of Rs. 185 per share for EXPO favourably at this point, given that the offer generates a sizable premium to our current DCF-derived fair value for the company based on projected estimates.”

It said EXPO announced on 1 March 2024 after market that its Board has resolved to delist its shares from the CSE. Further to the announcement, the principal shareholder of EXPO – SG Holdings Global Ltd., proposed a voluntary exit offer of Rs. 185.00 per share to the minority shareholders of the company.

EXPO’s share price witnessed strong gains in 2021 and 2022, and at one point reached Rs.  400.00+/share in early 2022, in line with the company’s record outperformance in FY22 and FY23. However, we should note that this share price performance was largely driven by extreme dislocations witnessed in the global freight market owing to the COVID-19 pandemic. Given that freight rates have corrected sharply to historical averages by early 2023, we do not foresee a near-term catalyst that could materially alter the freight rates environment.

Our current DCF-based fair value for EXPO considers projected estimates for the company in the backdrop of a more normalised freight market. In our view, the voluntary exit offer for EXPO compares favorably to our fair value estimate for the following reasons: 1) normalisation of the global freight industry with rates stabilising closer to historical levels despite near-term disruptions in the Red Sea route, 2) expectations of only a modest recovery in profitability in FY25E, 3) likelihood for the stock to de-rate if EXPO is unable to delist and starts to trade again, given the backdrop of atepid financial outlook and overall uncertainty post the delisting initiative.

Losses over the past 4 quarters in the backdrop of declining freight rates

EXPO has reported total losses of roughly Rs. 13.5 billion over the past 4 quarters, and we expect the company will report another loss in 4Q FY24E. With overall consumption expected to pick up in the US and Europe in 2H 2024, and interest rates starting to taper, we estimate a modest recovery in profitability for EXPO in FY25E, led by an upturn in freight volumes. Although we expect volumes to pick up, we do not foresee rates will hit elevated heights seen during the COVID-19 pandemic, despite the ongoing disruptions witnessed in the Red Sea shipping lane, with the recent upward pressure on rates unlikely to persist in the long-term.

Elevated rates driven by demand and supply imbalances were a significant factor that drove EXPO’s and the wider freight industry’s outperformance during the COVID-19 pandemic, but with freight rates correcting sharply to historical averages by early 2023, we do not see a near-term catalyst that could materially alter the freight rates environment at this stage.

Furthermore, the rapid increase in the company’s fixed cost base since FY22, amidst the expansion of its operations during the pandemic and the recent appreciation of the LKR against the USD may pose near-term challenges to the company’s financial performance. Asia Securities said it has no direct affiliation with the company/companies covered in this report and does not receive any material benefit from the company for publishing this report.