Silk Logistics Holdings: Kemps Creek site deal

About the author:

Author name:

By Nathan Lead

Job title:

Senior Analyst

Date posted:

29 April 2022, 9:00 AM

Sectors Covered:

Infrastructure, Utilities, Banks

• The Kemps Creek site deal is better than we had assumed (re: incentive payments) and provides additional warehouse capacity that SLH can pursue for growth.
• Target price (login to view). ADD retained. Potential 45% total 12 month return.

Event

SLH announced today it had completed its NSW property novation.

Analysis

The NSW property novation has SLH transferring the land purchase cost and warehouse development risk of its Kemps Creek site to the developer (ESR Australia) in exchange for a 10 year lease for purpose built warehouses.

Conditions precedent to the lease agreement include ESR acquiring the site land and adjacent land, as well as planning, building and development approvals. 

The agreement may be terminated if the construction cost exceeds a prescribed amount (noteworthy given high rates of cost inflation at present).

The transaction results in SLH receiving $13.5m cash upfront in 2H22 (thus c.$3.5m net after taking account of c.$10m land deposit and stamp duty costs that SLH has already paid) and c.$28.9m of lease incentives staggered across three payments ($10.4m cash in FY23 subject to satisfaction of lease conditions and the lease agreement not being terminated; $10.4m cash in FY25 subject to practical completion targeted for 1HFY25; and $8.1m upon commencement of the lease which we expect will be used to fund warehouse fit-out capex).

We believe that the rent under the lease agreement is similar to what SLH is paying across its current NSW sites that it intended to consolidate at Kemps Creek, and that expiry of these existing site leases is closely matched to the expected commencement of the new lease. SLH’s strategy is to retain its existing sites and seek to fill the Kemps Creek warehouse with new business.

We estimate this scenario could be 31 cps NPV accretive taking into account the incentives and c.$2m/yr of estimated incremental cashflow across the 10 year lease term (with upside from Distribution earnings).

However, if SLH cannot secure sufficient growth it can let its existing leases expire and move its operations to the new site with minimal impact on costs. This is more conservative scenario is our base case and results in 18 cps NPV increase.

Forecast and valuation update

We had assumed only $10m of cash receipts from the lease deal in FY22. Factoring in the full incentive payments (net of related tax payable) positively impacts cashflow. Forecast net cashflow across FY23-25F is $17m higher in aggregate than we had previously forecast.

While we have not yet modelled this into our forecasts, we expect initial recognition of the lease into SLH’s accounts will add c.$73m of lease liability/ROU asset, and see c.$5m of net depreciation and first year interest expense of c.$3m.

DCF-based 12 month target price lifts 18 cps to (login to view) per share.

Investment view

ADD retained. We think the stock is too cheap (c.5x EV/EBITDA, c.12x PER (FY22F) given its potential double digit earnings growth and growth options.

Price catalysts

• Contract wins.
• Resolution of bottlenecks within the global container supply chain.
• Labour and warehouse capacity expansion.
• M&A.

Risks

• Fluctuations in and trend growth of container volumes, including COVID impacts.
• Competition given the highly fragmented markets in which SLH operates.
• Union industrial action.
• Capital management.
• Securing sufficient cost-competitive warehousing and labour for growth.

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