John Keells Stockbrokers declare Expolanka exit price as “fair”

John Keells Stockbrokers Ltd. has declared that Expolanka Holdings Plc’s exit price of Rs. 185 per share for minority shareholders is “fair.”

In a research note, JKSB said with a slow recovery in demand together with downward pressure on yields, it expects short-term profitability to be a challenge for the company due to its relatively high overhead cost structure. 

“However, assuming EXPO trades at a PER of 20x at the exit price, the company is expected to revert to net earnings of Rs.18,075mn in the medium term on its recovery. Therefore, we believe the exit price is a fair reflection of the company’s underlying fundamentals as it represents a PER well above the company’s historical trading range,” JKSB added.

Expolanka Holdings PLC proposed a voluntary delisting of the fully paid ordinary voting shares from the official list of the Colombo Stock Exchange on 1 March 2024 subject to shareholder approval. The Board of Directors of Expolanka Holdings PLC authorized the proposal for a delisting made by its principal shareholder at an exit price of Rs.185.00. The exit price represents a premium of 23% to the final closing price of Rs.150.50. The exit price as indicated by the principal is also a final offer which will not be subject to any further revision. The principal shareholder currently holds 82.43% of the shares of Expolanka Holdings PLC.

JKSB said the robust performance seen during the FY21 and FY22 was primarily driven by high demand from customers stemming from underlying factors such as 1) ultra-loose monetary policy adopted by central banks around the world, 2) the rush by retailers to ship goods to customer markets due to supply chain bottlenecks and 3) record high freight rates resulting from supply-demand mismatches. The company was able to pass on the rise in rates to customers resulting in a robust growth in yields. 

Expolanka Holdings PLC also recorded four quarters of consecutive losses since 4QFY23 on the back of decreasing demand from customers alongside the impact on yields due to corrections in both ocean and air freight rates.

Globally air and sea freight industries are still navigating through a post-pandemic recovery environment. Both air and sea freight have seen capacity increases and over-supply issues. Despite a marginal uptick in volume witnessed in recent quarters, overall demand remains sluggish in the logistics segment. Tight labor markets with persistent inflations have resulted in a delay in possible dovish monetary policy stance by the Federal Reserve. However, we expect volumes to start recovering in 3Q and 4Q of FY25 albeit at a slower pace. Subdued demand from customers will also lead to pressure on the yield on EXPO’s freight forwarding business as competition continues to hold prices to retain customer wallet share.

The Red Sea crisis has caused an uptick in global freight rates as shipping liners have looked at recovering additional costs and delays through surcharges. Unlike the logistics market during the pandemic which was driven by a supply-demand imbalance, the current volatility in rates is caused by geopolitical tensions. “We expect volatility to remain in the short term, however a resolution of the gulf hostilities may see an immediate reversal of high rates. The main beneficiaries of the volatility in ocean freight markets are the shipping lines while freight forwarding companies have had to absorb the high rates at the expense of lower yields to maintain customer wallet share,” JKSB said. 

It said that Expolanka Holdings PLC has looked at diversifying its logistics business to other segments such as warehousing, trucking, and brokering to reduce its reliance on the freight forwarding business. The structural changes are expected to result in stable revenues and net earnings as the company looks to mitigate the cycles of freight markets.