Radiant Logistics: Underwhelming Q4 FY23 Results, But Still Undervalued

Introduction

I’ve written a total of four articles on SA about third-party logistics solutions company Radiant Logistics (NYSE:RLGT), the latest of which was in March when I said that the Q2 FY financial results were strong, and the company had no net debt for the first time in its history.

Well, Radiant Logistics released its Q4 FY23 results on September 13 and I think they were weak as revenues slumped by 39.4% year on year due to macroeconomic headwinds while the adjusted EBITDA margin dropped below 14%. Yet, the company seems cheap even if adjusted EBITDA remains at about $10 million for a prolonged period of time and I’m keeping my rating at speculative buy. Let’s review.

Overview of the Q4 FY23 financial results

If you aren't familiar with the company or my earlier coverage, here's a brief description of the business. Radiant Logistics was established in 2006 and is involved in the provision of air and ocean freight forwarding and truckload, less-than-truckload, and intermodal freight brokerage services across North America. Most of the revenues come from freight forwarding and the company relies on a multi-brand strategy - Radiant, DBA, SBA, Navegate, Airgroup, and Adcom Worldwide.

The group has over 100 agent stations and more than 12,000 individual customers. Looking at the financials of the business, the compound annual growth rate (CAGR) since inception has been 24.4% for gross revenues and 31.2% for adjusted EBITDA which are quite high figures for a company in the logistics space. Yet, organic growth has been lacking, with Radiant Logistics booking declines in revenue during several years. Most of the company’s growth since its inception has come from M&A as Radiant Logistics has completed a total of 20 acquisitions to date.

In my view, an inorganic growth strategy makes sense here as this is a fragmented industry, and it seems that there are decent economies of scale to be realized as the adjusted EBITDA margin increased from 14% in FY06 to 18.3% in FY20.

In FY21 and especially FY22, the business of Radiant Logistics received a strong boost from COVID-19 test kit chartering and supply chain disruptions which is why EBITDA margins surpassed 20%. Unfortunately, the tailwinds for the business have been replaced with headwinds as Radiant Logistics complained about a slowdown in the freight markets in its Q4 FY23 financial report.

The confluence of shippers continuing to manage through elevated inventories, reduced imports and slowing economic growth, has had a cascading effect across virtually every mode of transportation. - source

The decrease in gross revenue accelerated to 39.4% in Q4 FY23 while adjusted EBITDA came in at just $9.2 million. This translates into an adjusted EBITDA margin of only 13.9% and is below the levels from FY06.

On a positive note, the slowdown of the business has enabled Radiant Logistics to significantly reduce receivables and free cash flow for FY23 was at a record $87.2 million. The company used this to pay off debts as well as buy back 1.78 million shares at an average cost of $6.20 per share during the fiscal year, including 0.94 million shares for $6.1 million in Q4 FY23 (see page 25 here). As of June 2023, Radiant Logistics had a net cash position of $26.6 million. This puts its enterprise value (EV) at $243.9 million as of the time of writing.

Looking at what to expect for the future, I think that Radiant Logistics could make another small acquisition over the coming months as it has a large cash position at the moment. However, it’s also possible that the company chooses to focus on share buybacks instead. Radiant Logistics said during its Q4 FY23 earnings call that it believes that we are at or near the bottom of the cycle and that the freight markets could start to stabilize over the coming quarters. The mentioned normalized annual run rate EBITDA was $50 million to $60 million, which suggests that quarterly EBITDA could rebound to about $15 million per quarter once the freight markets stabilize. In my view, this figure sounds realistic but it’s unclear how much time it would take to reach it in this environment.

Turning our attention to the valuation, Radiant Logistics is trading at EV/adjusted EBITDA ratio of 4.4x based on the FY23 financial results. At a normalized annual run rate EBITDA of $50 million, the ratio would increase to 4.9x. And if adjusted EBITDA stays at around $10 million per quarter for the foreseeable future, the EV/adjusted EBITDA ratio would rise to about 6.1x which I still consider low. The company has a strong balance sheet and a history of compelling revenue and EBITDA growth, and I think it should be trading at above 10x EV/adjusted EBITDA. Assuming a conservative $40 million of adjusted EBITDA per year, this translates into $7.90 per share or an upside potential of 35%.

Looking at the downside risks, I think that the major one is a long period with a slow freight environment in North America. In my view, this could be caused by a recession in the USA and BNP Paribas recently predicted that we could see a shallow recession in the country from January to July 2024. In addition, the share prices of microcap companies can sometimes decrease for spurious and unknown reasons.

Investor takeaway

Radiant Logistics posted underwhelming Q4 FY23 financial results as the boost from COVID-19 is gone and the freight sector in North America is experiencing a slowdown. Yet, I think the company has a pristine balance sheet at the moment thanks to a strong free cash flow in FY23 and that it's in a good position to weather the storm. Even if quarterly EBITDA stays at around $10 million over the next several quarters, Radiant Logistics doesn’t look expensive in light of its history of rapid growth.

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