CT CLSA recommends minority shareholders accept Expolanka ‘more than fair’ exit offer

Leading stock broking firm CT CLSA Securities is recommending to minority shareholders accept Expolanka Holdings Plc’s exit offer.

 “Given that the company is likely to take a long time to recover, we believe the delisting offer price of Rs.185 per share is more than fair and that shareholders should accept the offer,” CTCLSA said in a research report.

The Board of Directors of Expolanka Holdings (EXPO) announced that they had, at the Board Meeting held on 1 March 2024, considered a request from its principal shareholder and resolved to initiate the delisting of the Company's shares from the Official List of the Colombo Stock Exchange (CSE) subject to obtaining necessary shareholder approval and regulatory approvals.

The Board of Directors has in this context, made arrangements with SG Holdings Global Pte Ltd (SGH), the Company's majority shareholder, to purchase its shares from shareholders who may wish to divest their shareholding in the Company at a purchase price of Rs.185 per share.

Shareholder approval will be sought at the delisting EGM on 27 March 2024.

Following are excerpts from the report.

What fuelled the huge demand for freight during the pandemic?

The pandemic-induced demand from US consumers resulted in a huge demand for apparel, homeware and other items in FY21 and FY22. This resulted in logistics players, including freight forwarders such as EFL, seeing a huge growth in volumes as the import of these items increased.

The demand was driven mainly by two factors:

1.      Less opportunities to spend on entertainment and vacations due to pandemic-related restrictions resulting in a higher wallet share being allocated by the US consumer to buying tangible goods.

2.      Stimulus checks provided as part of the effort to boost the US economy due to pandemic-related impacts also resulted in higher consumer spending.

Additionally, supply chain challenges due to port congestion and COVID-related restrictions resulted in higher freight rates which led to higher margins during these periods.

 Sluggish demand since the FY22 resulted in EXPO making losses in recent quarters

With higher inflation levels in the US and the FED hiking policy rates to control inflation the demand from consumers declined sharply and it resulted in EXPO seeing lower volumes in recent quarters. The overstocking by US apparel brands and retailers also did not help as order flows were limited until inventory levels depleted back to more normal levels.

EXPO’s operating costs are largely fixed in nature resulting in a high degree of operating leverage. At lower volumes the company’s

Outlook and Valuations

EXPO is expected to witness a gradual recovery from 2H25E as consumer demand from the US recovers with the FED expected to cut rates by ~75bps by the end of 2024E. Recent initiatives taken by the management to reduce concentration risk on the US market as well as the apparel market within the US are expected to bear fruit in the medium to long term and result in less volatile earnings.

However, EXPO’s earnings are expected to take at least 3-4 years to ramp up to more optimal levels with the company returning to profitability in FY26E based on our expectations. Margin recovery is likely to be driven primarily by the recovery in volumes with freight yields (Gross Profit per kg of air freight or TEU or ocean freight rate) unlikely to witness any significant growth.

Even based on FY28E forecasts, where EBIT margins are expected to recover to ~3.2% which is more comparable with pre-pandemic levels of performance, the proposed delisting price of Rs.185 per share offers a valuation of ~28X PER. This is significantly higher than the 5-year median TTM PER level of ~12X at which the share traded prior to the last few quarters of losses.

Beyond FY28E we believe that the company has the potential to gradually expand EBIT margins further to ~5% given the higher degree of operating leverage achievable with its business model.

However, given that the company is likely to take a long time to recover, we believe the delisting offer price of Rs.185 per share is more than fair and that shareholders should ACCEPT THE OFFER.

CT CLSA recommends minority shareholders accept Expolanka's ‘more than fair’ exit offer