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Damian Illia
Damian Illia
Articles (175)  | Author's Website |

A Troubled Third-Party Logistics Provider Fights Its Way Back on The Growth Trajectory

March 11, 2014 | About:

UTi Worldwide Inc. (NASDAQ:UTIW) is a non-asset-based third-party logistics firm that provides international freight forwarding, customs brokerage, contract logistics and other supply chain services. The company operates a network of 300 freight forwarding facilities and 180 contract logistics and distribution centers in 59 countries. It also offers its services in 81 other nations through independent agent-owned offices. Contract logistics and distribution represent 30% of its gross revenue, while ocean and air forwarding generate 31% and 28%, respectively. The company is positioned among the top 20 global freight forwarders.

A Compelling Value Proposition

UTi is a beneficiary of the network effect. Its customer base of thousands of shippers has earned the company great buying power. The firm contracts with air and ocean carriers for wholesale cargo space, which it then fills with customers’ freight. Thus, it can obtain capacity more efficiently and at rates lower than those shippers can negotiate directly with carriers.

On the other hand, although global trade has been under pressure due to a slow economic growth in Europe and the U.S., long-term prospects are encouraging for the 3PL industry, which is expected to grow at a faster pace than the underlying transportation market. As international trade increases, so does access to flexible capacity and demand for more sophisticated supply-chain solutions. In this scenario, UTi’s large customer base and wide international presence pose a significant upside that enables the firm to garner market share from less capable providers.

A Fragmented IT infrastructure

Despite its competitive advantages, UTi has delivered average adjusted operating margins near 7% over the past five years, excluding non-cash impairments. These results become more disheartening when we compare them with the 30% average achieved by competitor Expeditors International of Washington Inc. (NASDAQ:EXPD) during the same period. This is partly due to UTi’s greater focus on lower-margin contract logistics, but it is mainly the result of its previous acquisition strategy. Years of heavy investment flooded the firm with inefficient and fragmented IT infrastructure which significantly affected the company’s performance.

Consequently, management has undertaken restructuring initiatives in order to integrate its IT systems onto a single platform, which will increase the company’s operational efficiency and eliminate excess overhead costs. However, its complete roll-out is plagued with delays and has led to material duplicative expenses, which the company expects to abate by August 2014, when all transactions are on the new system.

Going Concern

During second half of fiscal 2013, UTi underwent an unusual liquidity crunch, which led to debt covenant violations. Consequently, its auditor issued a “going concern” qualification. Therefore, the firm is refinancing its capital structure through a plan announced on Feb. 26, 2014.

Hereafter, the company expects gradual margin expansion from the integration of its IT platform. However, this improvement won’t be visible in the near term since the process isn’t yet complete, and slow economic growth in Europe and the U.S. is causing freight demand to remain sluggish. Thus far, UTi showcases a negative return on equity of -19.5% compared to the industry median of 24.1%. Its operating margin over the last year delivered a discouraging -1.9% against its rivals’ 8.6% average and net margin resulted negative as well, with -3.8% compared to its peers’ median of 5.2%.

Investment guru Joel Greenblatt (Trades, Portfolio) recently sold out his holdings in the company, backing my bearish feeling about UTi’s growth prospects.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website

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