PART2: Deep Dive on Environmental Segment of Logistec - TSE: LGT.B
In Part2 of this unfollowed family controlled company, I will do a deep dive on the environmental services segment and provide our key takeaways of both business
This following is the Part2 of the Deep Dive articles on Logistec. The article constitutes the authors’ personal views and is for entertainment purposes only. Please refer to the disclaimer at the end of this article for more details. In this article, we will go through:
The environment services business
Key takeaways after investigating both business (Marine and Environmental Services)
Please note that all figures in this article are in canadian dollars.
Renewal of underground water mains - ALTRA Solutions
Sanexen has developed over the years, (in the turn of this century) a technology currently branded as ALTRA Solution, that extends the useful life of a water pipes by over 50 years while avoiding the traditional dig-and-replace method for pipe replacement. Since there is no open trench, vehicular and pedestrian traffic can move more freely throughout the project and it allows businesses to stay open. The basic approach is to insert inside the existing water pipe system a high performing flexible fluid transport line. These flexible fluid lines are an enhanced version of the Niedner fire hose used by firefighters. Niedner was bought by Logistec in 2009. The fully structural pipe lining technology is equivalent to a new pipe and is designed to extend the useful life of the pipe by an additional 50 years.
The approach is being slowly adopted by authorities in Canada and in USA, mostly in dense urban areas where digging trenches to replace the water mains would be very disruptive for the city (business and traffic impact). A short video of the ALTRA Solution is included here.
As shown below, revenue related to this sub-segment has seen a steady growth of 8% CAGR since 2017.
Site Remediation
Site Remediation: The remediation of impacted soils, groundwater and lagoons. LOGISTEC offers services linked to the proper handling of hazardous materials in buildings and the replacement of underground hydrocarbon storage infrastructure, including the characterization and remediation of sites and risk assessment, as well as contaminated soils and materials management.
For this sub-segment, Sanexen operates mainly in Canada. According the 2016 annual report, Sanexen is unquestionably the number one player in Eastern Canada. Most major Engineering Procurement Construction (EPC) firms such as SNC Lavalin, Stantec and WSP have an environmental services division which compete with Sanexen. Each contract is probably awarded to the lowest bidder.
As shown below, revenue has been pretty much flat for this sub-segment. However, since Sanexen is the largest player in Eastern Canada, there is a narrow moat for this sub-segment.
Dredging and Dewatering
Dredging and Dewatering: The mechanical dewatering, both in mobile and fixed facility applications, dredging, lagoon cleaning, digester cleaning, tank cleaning, solids transportation and solids disposal, whether for landfill or for beneficial reuse.
With the acquisition of American Process Group in June 2021, Sanexen has expanded significantly in this sub-segment. The company has disclosed that APG had revenues of $32 million in 2021 with EBT of $5.5 million excluding the amortization of intangibles related to the acquisition. The purchase price was $52 million. Logistec purchased APG at a EBT ratio of around 10, which is reasonable. The operating margin is attractive around 17%. This seems like a very good acquisition. Furthermore, it operates in the western Canada and in the USA, which may help Sanexen to expand in these geographical areas.
Niedner - Altra Product
Niedner, a leading North American fire-hose manufacturer, was purchased by Sanexen for $13.9 million in 2009. Niedner was providing the critical high performing flexible fluid transport line used by Sanexen for their ALTRA technology. Niedner still operates as a fire-hose manufacturer for external customers.
The revenue is cyclical. I noted that for the first 9mo of 2022, revenue are up by 15% versus 2021, so we could be in an uptrend.
10Y Revenue CAGR of 12.0%
In the last 10 years, the environmental business has grown revenue at a very good 12.0% CAGR. Note that 2022 numbers are based on my 2022 estimates (q4 has not been released yet). We will need to wait until mid March to get the final 2022 numbers.
However, the Revenue growth can be mostly explained by 2 major acquisitions: FER-PAL in 2017 and APG in 2021.
UPDATE: On March 22nd 2023, The company has released sales of $ 331 million for the environment business.
The FER-PAL Struggle
The purchase of 51% of FER-PAL in July 2017 has increased the top line by around $100 million. FER-PAL is an integrator of the ALTRA solution and had generated $97 million in revenue and $8 million in EBT in 2016. Logistec paid $49 million for 51% of the company, or about 1 time sales.
The acquisition of FER-PAL did not go smoothly. As stated in the 2018 annual report, As of December 31, 2017, based on the lower than anticipated performance of FER-PAL, an estimated gain of $5.3 million was recorded. Revenue from the environmental services segment totalled $244.1million, compared with $270.5 million in 2017, a decrease of $26.3 million. This decrease is mainly due to lower revenue generated by FER-PAL and site remediation.
I suspect that FER-PAL had significant operational issue and the integration did not happen without difficulties. The whole environment services segment went into the red because of this acquisition in 2018! The management had high hopes to use FER-PAL to sell the ALTRA solution to the rest of Canada and the USA. The geographical expansion of the ALTRA solution is taking more time than expected and the management probably overspent south of the border.
In 2019, things were a bit better, as stated in the 2019 annual report: we are pleased to show significantly better results for FER-PAL Construction Ltd. (“FER-PAL”), whose results were very disappointing in 2018.
As we can see in the previous figure, the Altra Solution revenue line has steadily climb from 2019 to 2021. However, revenue decline is expected in 2022 due to contract delays. Management discusses this issue in the last conference call and is confident that business will pick up in 2023. To be monitored.
10Y Cyclical EBT CAGR of 7.7%
Over the past 10 years, the environmental services business have provided a cyclical CAGR of 7.7%. Even if we discard the 2018 result, due to the struggles of FER-PAL operations in 2018, we can observe that from 2016 to 2019, the environmental services business has generated poor level of profits. This business seems cyclical.
Looking at EBT Margin for both Business segments
The following shows the EBT margin of the environmental services business, showing the cyclicality of this business unit. The EBT margin goes from 0% (2018) to 13% (2013). Clearly Logistec needs to improve the EBT margin and hopefully achieve the 10% level prior to the FER-PAL acquisition.
In contrast, the marine business unit provides much better and stable operating margin. Since 2018, the year Logistec made the significant GSM acquisition, EBT margin have been moving upward. Please note that the 2022 number is based on my estimates since Q4 is not yet release. Before the GSM acquisition, the EBT margin was hovering between 8.7% and 14.5%. Hopefully, Logistec can get back to this margin range over the next few years. 2022 is projected to be within this range. To be confirmed.
Key Takeaways
The Marine business is vastly superior. It generated a smooth 14% CAGR over the last 10 years both in terms of revenue and EBT. In contrast, the environmental segment generated 7.7% CAGR for the same period, with a lot of up and down.
If you look at the cumulative EBT earned by both segments since 2012, the marine segment earned $285 million or 65% of total earnings. The environmental segment earned $155 million.
Only 1/3 of the growth of the marine business has originated from bolt-on acquisitions, the rest being organic. In contrast, the majority of growth for the environmental services has come from two acquisitions - FER-PAL and APG.
In the last 10 years, Logistec spent $143 million to grow the marine business and $100 million for the environmental services business.
The FER-PAL Acquisition was very difficult and this division performed poorly in 2018 and is still dragging down the EBT margin.
For the reasons mentioned previously, I believe that Management should focus almost exclusively on the Marine business for future M&A. If acquisition opportunities are rare in the marine business for a few years, I would recommend to pay down debt instead - especially considering the rising interest rates.
On the environmental services, site remediation and dredging and dewatering do have a narrow moat, provides attractive returns and EBT margin based on the EBT margin achieved prior to the FER-PAL and the margin achieved by APG in 2021.
Based on our estimates, the maritime business in 2022 will represent 62% of Logistec revenue and over 70% of Logistec EBT. The marine business is superior and more consistent, and can grow organically. It represents a very large portion of the operating earnings and hopefully will represent an even larger portion of the overall Logistec operation in the future.
Part III will evaluate Logistec from different angles to assess whether this company is a compounder. Compounders are companies that can deliver sustainable and long-term eps growth with a good RoIC.
Feel free to send an email for any questions or comments or leave a comment below.
Disclaimer: The above article constitutes the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. The information provided in this article is not making promises, or guarantees regarding the accuracy of information supplied, nor that you guarantee for the completeness of the information here. The information in this article is opinion-based and that these opinions do not reflect the ideas, ideologies, or points of view of any organization the authors may be potentially affiliated with. The authors reserve the right to change the content of this blog or the above article. The performance represented is historical" and that "past performance is not a reliable indicator of future results and investors may not recover the full amount invested.