For a company with a turnaround plan, the most important question for prospective investors is whether the company has enough financial strength to go through the turnaround. A few months ago, when you asked me such a question about UTi Worldwide (NASDAQ:UTIW), I might be hesitant to give a definite answer on whether UTIW can survive the significant cash flow outflow from working capital changes. But after UTIW successfully secured $150 million ABL facility, together with $400 million aggregate principal amount of 4.5% convertible senior notes due 2019 and $175 million of convertible preference shares, I am more confident that the combined new $725 million refinancing, relative to $950 million market cap, should help to alleviate the "going concern" possibility raised by auditors
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Source: 10-Q
To further reduce the liquidity concern, UTIW has $206 million cash on the balance sheet and around $150 million untapped credit facility available for future cash flow need according to the latest 10K above.
Once we find ourselves comfortable with the financial health of UTIW, we can then focus on the turnaround plan and see the 50% upside potential awaiting for high risk-tolerant investors.
Why did UTIW decline to such low level?
Source: Google Finance
It is concerning for shareholders when they see around $130 million operating cash outflow from changes in working capital. It is no wonder that UTIW has then been alerted as a "going concern," which indicates that UTIW has a reasonable possibility to go out of business. Nevertheless, after the recent $725 million refinancing, I believe that UTIW has enough capital to survive. Plus, UTIW expected to be free cash flow positive for the full fiscal year 2015 announced during the Q1 2015 conference call. Indeed, the liquidity concern helps to provide an attractive entry point for high-risk tolerant investors to accumulate a stock with a turnaround opportunity.
Business overview
UTIW provides non-asset-based supply chain services and solutions worldwide. It has two operating segments: Freight Forwarding and Contract Logistic and Distribution. With a comprehensive global network, UTIW owned 310 Freight Forwarding locations in 253 cities in 59 countries. Its major customers are in consumer & retail, Hi-Tech, fashion and apparel, pharmaceutical, automotive, and chemical. The following chart gives more detail about the comprehensive global network:
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Source: Company Presentation
Furthermore, the well respected Gartner Magic Quadrant study named UTi an industry leader among 3PL providers. This makes UTIW the only headquartered in the U.S. company to receive such recognition. In fact, this designation helps to drive potential clients to identify and possibly select UTIW as the vendor to meet their global logistic needs. In other word, this designation will increase sales for UTIW.
Transformation Cost Reductions
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Source: Company Presentation
The transformation cost reduction program mainly relies on the 1View freight forwarding operating system. The following is the update from the management team during the Q1 2015 conference call:
We launched our 1View freight forwarding operating system in five new countries since our last earnings call at the end of March. This brings the total to 37 in terms of the number of countries on the new system, which equates to approximately 77% of transactions. This represents significant improvement in the last 12 months. Last year at this time, we had launched 1View in 15 countries, which produced just 10% of transactions.
Listening further to the management team, we found that the 1View freight forwarding operating system could also help UTIW to drive growth opportunities. First, the new system would allow UTIW to serve small and medium-sized customers in a more cost effective manner as UTIW will have a single global platform soon. Second, additional benefits included integrated information, greater shipment visibility, enhanced data analytics and inventory optimization capabilities. Third, 1View system is expected to be one of three global systems in the entire industry providing real competitive advantage for UTIW. The new system is further expected to fundamental change the way UTIW operates and provide consistent solutions for customers.
Valuation
Once the transformation cost reductions program completed in fiscal year 2016, the profit margins of UTIW is likely to rebound back to peers' level. To be conservative, I would assume that in two years UTIW will be able to achieve 14% EBITDA margins.
| Net sales in 2 years (in million) | 1655 |
| 14% EBITDA margin (in million) | 231.7 |
| 8x EV/EBITDA valuation | 1,854 |
Furthermore, I assume that UTIW will grow its sales by 4% per year and attain 8x EV/EBITDA valuation. As a result, UTIW should be worth about $1.8 billion enterprise value, implying 50% upside potential.
Share price near the lowest in a decade
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Source: Yahoo Finance
As we can see from the chart above, UTIW has been trading close to the lowest share price in a decade ago. Although there are still issues awaited to be resolved for UTIW, the new financing should provide enough financial power for UTIW to realize the benefits of the turnaround program. Once UTIW can restore its earning margins comparable with its peers, UTIW will be reevaluated and be able to provide sizable returns for its loyal shareholders.
Management team
Eric Kirchner has been the CEO of UTIW since January 2009, and he helped UTIW navigate through the worst recession in 2009. He has 28 years of experience in the transportation and logistics industry. For the new 1View freight forwarding operating system, Eric Kirchner is an ideal leader since he served as co-integration manager and member of the UPS integration steering committee which facilitated the transition of Menlo Worldwide Forwarding. He has experience in integrating various IT systems. As the successful implementation of the new IT system is crucial for UTIW, prospective investors should find comfort knowing that Eric Kirchner is in charge of the transformation and of the whole company.
Risks
First, UTIW might have missteps in the implementation of 1View freight forwarding operating system and unable to achieve the $95 million cost savings as anticipated. Second, UTIW is subject to Foreign Exchange rate risk. Third, there are a few lawsuits against UTIW, which bring litigation risk for prospective UTIW investors. Fourth, please refer to the risks section of the 10Kto further understand the business risk investing in UTIW.
The bottom line
As UTIW left the liquidity issue behind with the new $725 million refinancing, prospective investors should shift their focus to value UTIW in regards to a successful turnaround. As UTIW has been making progress towards the $95 million savings with $50 million already been achieved, investors should start to reevaluate UTIW more in line with its peers. For high risk tolerant investors, I believe that the 50% upside potential is more than enough to compensate for the uncertainty involved in UTIW. Especially UTIW is under the leadership of a seasoned CEO, Eric Kirchner, I am confident that the turnaround will likely help prospective investors to reap sizable returns in UTIW.
Disclosure: I am not a securities broker/dealer or an investment adviser. You are responsible for your own investment decisions. All information contained should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision.
