Logistec Delivers Profits, Decade After Decade - LGT-A, LGT-B

A note: I have decided to expand this blog's focus to include listed microcap and/or illiquid securities. The unlisted world is and will remain my bread and butter, but I am simply finding more opportunities for profit outside that world than I can ignore.

Logistec is one of those opportunities.

Logistec provides stevedoring and cargo management services. Simply put, Logistec manages the loading and unloading of ships that come to harbor, as well as cargo storage and warehousing. Logistec also has operations in environmental remediation through its subsidiary Sanexen Environmental Services and manufactures woven hoses. Logistec has been in operation since 1952, when it was founded as Quebec Terminals by Roger Paquin.

Logistec operates in 24 ports in Eastern Canada and the eastern coast of the US. Half of these ports are located on the Great Lakes or along the St. Lawrence Seaway. The Great Lakes and the St. Lawrence Seaway are Canada's connection from its economic centers in Ontario and Quebec to the Atlantic Ocean and foreign trading partners. Ports along these bodies of water allow for goods and commodities from Canada's interior to be shipped around the world.

Ports and ports operations are great businesses. The world supply of ports is limited due to geography, so ports and associated companies enjoy high barriers to entry and associated pricing power. World trade tends to increase over time, providing a natural revenue growth tailwind.

Logistec is a classic "toll-taking" company that profits on trade volume, irrespective of shipping rates or commodities prices. Logistec is capable of handling all kinds of commodities, including metals, agricultural products and forest products. Logistec enjoys long-term leases at the ports where it operates, ensuring the profits will flow for years to come.

And how the profits have flowed. Logistec's record of growth and profitability is nothing short of incredible. Logistec has never lost money in its existence as a public company. Beginning in 1969, Logistec has reported 43 consecutive years of profits. The company has paid a dividend in every one of these years. Top-line growth has been impressive as well. From 1969 to 2012, Logistec grew revenues from $5.94 million CAD to $250.86 million CAD, a compound annual growth rate of 9.1%. The company achieved all of this using minimal leverage. To help visualize this achievement, the company provides this graphic on its website.

Revenues sank when world trade volumes dipped during the recession, but have now rebounded. A healthier world economy combined with a few smart acquisitions has allowed Logistec to post record revenues and profits figures.

For the first quarter of 2013, Logistec reported an impressive revenue increase of 44.0% year-over-year in its marine services division. This increase is largely due to the company's mid-2012 acquisition of CrossGlobe Transport, Ltd. CrossGlobe operates in three terminals at the Port of Virginia, handling forest products, auto parts and other cargoes. Logistec's business is slowest when the St. Lawrence Seaway is closed during the cold Canadian winter months, so the addition of another southern port to the company's operations resulted in a large increase in first quarter revenues and earnings.

While marine services account for the majority of Logistec's operations, the company's Sanexen Environmental Services subsidiary is another important profit center. Sanexen provides environmental remediation at industrial and disaster sites (the company is working at the site of the recent Burlington, Ontario train crash) and also does environmental studies. Interestingly, the company has developed a technology known as Aqua-Pipe, which can be used to rehabilitate aging underground water lines. The advanced ages of many municipal water distribution systems could result in increasing demand for pipe rehabilitation.Sanexen's 2012 revenues rose 14% from 2011, eclipsing $100 million for the first time. Logistec holds a 69.7% interest in Sanexen, with Sanexen's management holding the remainer.

Logistec maintains a strong balance sheet. Net debt is only $12.18 million CAD, 0.33 times EBITDA. Total debt is $20.12 million CAD, 15.68% of owners' equity. The company maintains multiple pension plans, but each of these is fully-funded, even at the 2012 discount rate of 3.8%.

For the twelve trailing months, Logistec earned $19.21 million CAD, or $2.97 CAD per share. The company has two classes of shares outstanding. A shares are entitled to 30 votes per share. B shares are entitled to just one vote per share, but receive 110% of the dividends paid on A shares. (If A shares receive $1.00 in dividends, B shares receive $1.10.) B shares currently trade at a precise 10% premium to A shares, though they have historically traded at a slight discount.

A shares currently trade at $28.51 CAD and B shares trade at $31.39. Based on the number of shares of each class outstanding, Logistec has a market capitalization of $192.19 million CAD. Adding net debt gives a total enterprise value of $204.37 million CAD.

On the whole, Logistec trades at 10.01 times trailing earnings. A shares trade at 9.60x, while B shares trade at a 10.57x. The entire capital structure goes for an extremely reasonable 5.57 times EBITDA.

10x earnings or 5.5x EBITDA is a compelling valuation for a company with Logistec's competitive advantages and enormously successful track record. Keep in mind that Logistec's trailing figures include less than a half-year of CrossGlobe's results. Included, these would push down the multiples a bit more.

The market does not offer many opportunities to purchase businesses of such quality at these multiples. For as long as people across the world demand goods and services, ships will ferry commodities across the oceans. And for every ship that enters the harbor, someone will have to load and unload it, coordinating the process and ensuring efficiency.

One reason for Logistec's low valuation is its illiquidity and obscurity. Despite its 61 years in operation and exceptional returns to shareholders, the company remains tiny, with a market cap under $200 million. And its shares are illiquid. Logistec is controlled by Sumanic Investments, which is in turn held in equal parts by three daughters of the company's founder, Roger Paquin. One of these daughters, Madeline Paquin, serves as President and CEO of Logistec. Over the last three months, each classes of shares has gone days without trading, and the highest volume day for either share class saw only 1,900 shares change hands.

Logistec pays a small dividend, with occasional larger special dividends. Shares (both classes) currently yield 1.3%. The company engages in small share repurchase programs, reducing shares outstanding by 1.8% since 2010.

Risks to Logistec's success include major shifts in global trade patterns, or a great leap in port technology that Logistec cannot afford to adopt. A prolonged global recession would sharply reduce earnings in the short run. Foreign investors must also consider currency risk. The Canadian Dollar has lost ground lately as commodities tumble.

I own shares in Logistec.