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Transport stocks seem an unlikely idea in a sluggish economy. But some small transportation companies are making good gains and seem well positioned to benefit in the next few years as the economy eventually recovers and more food is exported to Asia.

Only a handful of road-transport stocks remain on ASX after mergers. The micro-cap stocks Chalmers Limited, K&S Corporation, Lindsay Australia and the troubled McAleese are best known. The diversified CTI Logistics provides transport exposure and other services.

I favour Lindsay Australia and have a watching brief on K&S. McAleese looks more interesting after heavy price falls since its Initial Public Offering last year, and amid signs of earnings stabilisation. But it is too early to buy.

First, a word of warning. Small transport stocks suit experienced investors comfortable with higher risk. They can be volatile and illiquid, making it harder to buy or sell large parcels of shares quickly. They can also be unpredictable: McAleese’s crashing share price, a result of safety problems on its gas-transportation fleet, shows the dangers.

Risks aside, Lindsay is an interesting long-term idea. The well-performing NAOS Emerging Companies Fund has been buying Lindsay for its exposure to the emerging foodbowl in North Queensland, and leverage to the coming “dining boom” as more food is exported to Asia.

Lindsay earns about 72 per cent of revenue from carting general and refrigerated products in its Lindsay Australia trucks.  It specialises in moving temperature-sensitive items, such as fresh produce, to major grocery distribution centres and chilled- and frozen-food manufacturers. The rural supplies division, a seller and distributor of farming-input products, contributes the rest of Lindsay’s revenue.

Lindsay was mostly range-bound between 15 and 25 cents for four years after the 2008 GFC. It has rallied from 20 cents in early 2013 to 38 cents on improving turnover as the market re-rates its prospects. Lindsay’s one-year total shareholder return (including dividends) to August 13 is 68 per cent, according to Morningstar. Who said transporters can’t prosper in a slow economy?

Chart 1: Lindsay Australia share price

Source: ASX

A key shareholder, Washington H Soul Pattinson and Company, lifted its stake in Lindsay from 16.6 per cent to 18.5 per cent in March. The Lindsay family had a 19.5 per cent stake in March, and a few other shareholders have double-digit holdings, meaning liquidity is relatively low.

I suspect the market is re-rating Lindsay’s potential as a play on food exports, which could be Australia’s next boom as the number of middle-class consumers in  Asia increases more than sixfold to 3.2 billion by 2030, on government estimates. Higher spending power in emerging Asian countries and population growth mean greater demand for food and dairy products.

Owning one of Australia’s largest fleets of refrigerated trucks gives Lindsay an interesting market position and some competitive advantage as demand for exported fresh produce grows. It has increased its investment in the North Queensland horticulture industries and has stgeloped a new transport market segment, Lindsea, to service the seafood industry.

These strengths are reflected in a Return on Equity of 13.2 per cent in FY13 – the highest in a decade – and above average for road-transport companies.  High and rising ROE is always a good sign and usually a precursor to a higher intrinsic value of a company, and a rising share price.

The gains are more impressive given recent weakness in the sector. Another small transport provider, Chalmers, warned in June of a negative market outlook, and singled out the Queensland market, key for Lindsay, as particularly difficult because of drought. It wrote that for cyclical reasons, the sectors in which Chalmers provides services had, overall, performed below expectations, and that the company had continued to witness degrees of conservatism and uncertainty.

Even so, I see Lindsay heading higher in the next few years. After such strong price gains in the past 18 months, it is probably due for a pullback, and waiting until it reports full-year profits has merit. Those with a long-term perspective, and risk tolerance, might buy sooner.

Another micro-cap transport stock, K&S Corporation, has rallied from a 52-week low of $1.24 in July to $1.49, after heavy price falls in the first half of 2014. K&S has bedded down the acquisition of Scott Corporation, appointed a new managing director, and scored a few new contracts.  It has a lot of work ahead, given a 5-year annualised total shareholder return of almost minus 6 per cent. And, equally, scope for higher returns if some of its recent momentum continues.

Chart two: K&S Corporation share-price chart

Source: ASX

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at August 13, 2014.

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