YRC Worldwide share gains continue after a mixed second quarter

Following a decent trading update, US trucking firm YRC Worldwide continues to shore up its equity valuation, which has now almost doubled to $12.4 a share since a trough in early February this year.

In our previous quarterly coverage, we argued that its less-than-truckload portfolio of assets was making good progress, and recent results arguably reinforced that view.

Operating revenues remained under pressure at $1.2bn in the three months ended 30 June, down 4% year-on-year. However, good costs management helped YRC shore up its operating profits, which rose to $57.2m and $70.6m, respectively, in the second quarter and in the first half of the year from $56.9m and $60.6m one year earlier.

Its market cap is $413m, yet its enterprise value, which includes net debt, is about $1.2bn, and testifies to a stretched financial position – forward net leverage stands at about 3x, but is falling.

While its shares remain a speculative trade, given its current debt position and a zero-dividend policy, trading multiples still appear to point to a value story despite the recent rally, even though any possible capital appreciation from these levels depends on how the firm manages cash flows.

The good news, however, is that it recently almost reached break-even in terms of core free cash flows, with operating cash flow coming in at $47.5m in the first half of the year against $31.1m one year earlier. True, it had marginally higher capex requirements at $47.3m and incurred higher debt repayments, but cash and cash equivalents nonetheless surged to $243.5m from $184m in the previous quarter and from $173.8m at the end of 2015.

Financial improvements went hand-in-hand with a stronger operational performance. During the quarter, the firm said that YRC Freight launched its new Accelerated service which allows customers’ non-guaranteed shipments to reach their destinations one to two days faster than standard transit times.

Its operating ratio improved even though trading conditions remained challenging, with the group saying “second quarter 2016 tonnage per day decreased 6% at YRC Freight and 2.4% at the regional segment compared to the second quarter 2015”.

Year-on-year tonnage per day fell in the second quarter, but “in June the decline was much smaller than (in) April and May”, Chief Executive James Welch noted.

“While the uncertain industrial economy continues to impact the trucking industry, we remain focused on actions within our control,” he added.

Although second-quarter results did not meet the company’s expectations, at least operationally, it continues “to strengthen for the long-term” at a time when pricing discipline in the LTL sector remains steady despite macroeconomic headwinds and lower fuel surcharge revenues.

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Source: Transport Intelligence, August 9, 2016

Author: Alessandro Pasetti