© Khunaspix Dreamstime.

US 3PL UTi Worldwide yesterday announced a quarterly loss, as revenues decreased 6.6% on the back of falling freight rates and restricting costs.

Its third-quarter revenues were $1.08bn compared with $1.15bn in the same period last year, while net revenue – after purchased transport costs – was $381m, down 3.1% from $393.5m.

Management said that on a constant currency basis, revenues were down 4.3% and net revenue up 0.1%, while its net loss considerably widened from the third quarter last year, rising to $34m, compared with $9.1m.

Which begs the question: would a change of ownership be a blessing for UTi Worldwide’s shareholders? It is an issue that has been implicit in the changes in UTi’s share price in recent days.

On 3 December, soon after takeover rumours emerged, UTi confirmed that discussions had taken place with Denmark’s DSV, although it insisted they had been unsuccessful.

UTi shares surged to $14.60 from $11.50 on the day rumours began to circulate, and changed hands at between $12.20 and $13.50 until Monday following the announcement. One week later, the stock is now valued at $11.70, roughly in line with UTi’s unaffected stock price on 3 December. Back to square one.

The departure of chief executive Eric Kirchner, announced shortly ahead of the quarterly results, did not contribute to the fall of the shares, which have lost 33% of value year-to-date, and although the quarterly results did little to lift spirits, they are also not to blame for a poor stock performance.


In a follow-up call with analysts, in which questions on the talks with DSV and the departure of Mr Kirchner were not answered, management defined UTi as a “highly attractive organisation”, which strives to deliver “shareholder value”, and added that it needs more “freight forwarding focus”, among other things.

UTi is intent on cutting costs, rather than actively seeking for new partners. Without giving away much detail, UTi management said the group would likely hit ambitious free cash flow targets in fiscal 2015, and Ebitda of between $190m and $210 in 2016. Moreover, managers are not relying on revenue growth to turn around the group’s fortunes.

However, it remained unclear how adjusted operating cash flow will reach $200m in less than 18 months. While some $100m should be generated by targeted cost savings, it is unclear where additional cash flows will come from, given that working capital is only marginally improving.

The company operates two units – with freight forwarding generating two thirds of the group’s $4.4bn revenue. Growth and margins remain under pressure, as do revenues, while negative currency movements also diminish the US dollar value of sales. By contrast, contract logistics and distribution, UTi’s smaller unit, is growing and return on invested capital is on its way up.

On its own, UTi will likely face an uphill struggle to deliver value in the next few quarters.

One possible strategy for management is that it could facilitate a change of ownership by breaking up UTi into two separate and independent entities in order to attract bids. It appears evident that any meaningful upside would come from a successful restructuring of the core freight forwarding unit rather than from sustained growth at contract logistics and distribution.

However, management may equally argue that the two units belong to each other.

Nonetheless, with shareholder value at stake, some will argue that bold action is required.

Capital structure, counterparty risk & currency risk

UTi’s capital structure was amended in early 2014. As a result of a comprehensive refinancing round, which was forced upon UTi by its lenders, the US forwarder issued expensive equity-like capital, which now sees its largest shareholder – hedge fund P2 Capital Partners – taking home 7% per year in the preferential issuance

And UTi faces other problems. In seven years of business in South Africa, a key revenue driver, some $11bn of revenues were generated, and only $1m has been written off, according to UTi’s management, but counterparty risk may lead to bigger losses with its exposure to the bankruptcy of a large client operating in the mining sector.

Given UTi’s broad geographical reach, another headache is how to repatriate cash held abroad, to which there appears little immediate solution, unless cash is not repatriated at all.

Moreover, the persistent strength in the US dollar seems likely to continue into 2015 and beyond, with resulting downwards pressure on revenues, meaning that its attractiveness as an acquisition target is dimmed.

On the one hand, the stock is not expensive – its market value is in line with the value of its current assets per share. On the other hand, UTi reported net losses of $76.7m and $100.5m for fiscal 2014 and 2013, respectively, and it’s highly unlikely it will be in the black this year.

The longer management waits, the cheaper the stock may become unless, of course, UTi’s managers are right and profitability can be restored, and new chief executive Ed Feitzinger is correct to assert that the worst of the restructuring is behind the company.

“Earlier this year, we were working through service issues and billing challenges associated with the rollout of our freight forwarding system in the United States. Since then, our service has improved dramatically,” he said.

“These past issues adversely impacted freight forwarding growth and free cash flow for several quarters. The third quarter marked a turning point in a number of areas. Airfreight kilos improved on a year over year basis for the month of October and adjusted EBITDA improved each month during the quarter.”

Comment on this article

You must be logged in to post a comment.