TFI International Inc.
(TFII-T) C$132.06
Portfolio Shuffling Towards Asset Light with U.S. TL Transaction Event
Yesterday morning, TFI announced an agreement to sell its CFI Truckload, Temperature Control, and Mexican non-asset logistics businesses to Heartland Express for US$525 million, subject to certain agreed-upon adjustments. The transaction is expected to close in Q3/22, and is subject to regulatory approval.
Impact: SLIGHTLY POSITIVE
We are maintaining our BUY recommendation and C$160.00 target price. Due to TFI maintaining its 2022 EPS guidance of $8.00 per share despite the loss of one quarter of contribution from the divested assets, our previous assumptions about the revenue and margin profile of those assets in 2023 and 2024, and other minor modelling updates, the net impact on our valuation-period forecasts (EPS, EBITDA, and net debt) is insufficient to alter our target. We view the decision to sell the CFI assets as aligning with the company's strategy of focusing on high-margin and high- return assets that are concentrated within the LTL, Specialized TL, and Logistics industries. TFI has a history of successfully redeploying capital into shareholder- value-enhancing investments, and we see no reason to expect anything different as management explores other uses for the US$525 million in proceeds over the coming quarters and years.
The sale of the CFI assets removes some of TFI's most capital-intensive operations, and those that compete within a sub-segment of the industry that has lower barriers to entry and ROIC relative to other segments (two-year average ROIC of 5.9%). To the extent that public company valuations are indicative of current private TL transaction valuations, we recognize that TFI may not have divested of the assets at a high valuation. However, we believe that the low valuations for other sub-segments of the trucking and logistics industry mean that TFI can redeploy the capital at equally attractive (relative) multiples while increasing the company's overall exposure to higher-return/-margin LTL, Specialized, and Logistics markets.
TD Investment Conclusion
Although we expect that consumer spending and economic uncertainty would impede multiple expansion in the short term, we believe that TFI's valuation relative to comps, above-average historical and forecast growth, prudent financial leverage, and track-record of shareholder value creation support a higher share price and our BUY recommendation.