Forager backs CTI Logistics to bounce back

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High-performing investment manager Forager Funds Management disclosed in its latest investor report that it has recently become a substantial shareholder in CTI Logistics, a courier and warehousing company.

The end of the mining boom has hit the Perth-based company’s earnings and share price, putting it into the category of “unloved” stocks that Forager looks for.

The Forager Australian Shares fund produced a return of 25.2 per cent for the 12 months to the end of June, compared with a 13.1 per cent increase in the S&P All Ordinaries Accumulation Index over the same period.

The fund has been remarkably consistent. Over the past three years it has produced an average return of 18.4 per cent a year, compared with the index return of 6.8 per cent a year, and over the past five years it has produced an average return of 21.7 per cent a year, compared with the index return of 11.6 per cent a year.

Under chief investment officer Steven Johnson, Forager runs relatively concentrated portfolios of what it describes as “often unloved” securities.

CTI Logistics has a strong competitive position in the Perth delivery market: 30 per cent of on-demand taxi truck deliveries; 35 per cent of courier deliveries; and 40 per cent of same-day parcel deliveries.

The company also provides third-party contract warehousing. It is the national market leader in storage and distribution of floor coverings.
According to Forager, the end of the mining boom hurt CTI’s business. In 2015/16 it generated $150 million of revenue but made only $2 million of net profit. Net profit was $10 million in 2013/14 and $6 million in 2014/15.
CTI’s share price has fallen from a high of $2.75 in 2013 to the current level of around 84 cents – a 69 per cent drop. Current market capitalisation is $62 million.

The company has net tangible assets of $63 million and $20 million of franking credits in its franking account.
Forager says demand for the company’s services has fallen but it is confident the company can adjust its cost structure to new market conditions. CTI owns only a small number of the vehicles it uses and most of its workers are contractors.

The company’s 30-year old delivery network is a hard asset to replicate and once the WA economy recovers CTI should bounce back, Forager says.

And it reckons that, based on CTI’s financial report for the six months to December, the company should be able to earn net profit of around $6 million for the full year. On this estimate the company is trading on a PE multiple of 10 times.

CTI management has “skin in the game”, with the three main directors owning close to 60 per cent of the company. Each has a long association with the business.

Book value per share (the value at which assets are carried on the balance sheet) has grown from 18 cents in 2004 to $1.25 today – a compound annual growth rate of 17 per cent.

While it is a promising investment, CTI’s shares are extremely illiquid, with only a few thousand shares trading a day.

“Investing in illiquid securities is not a problem per se. In fact, it is often one of the reasons why a stock might be mispriced,” Forager says.

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