CIBCHave a USD 127.00 target. GTTA
EQUITY RESEARCH
August 22, 2022 Flash Research
TFI INTERNATIONAL INC.
Selling CFI’s Truckload, Temp Control And Mexican Logistics
Business To Heartland Express
Key Takeaway: TFII is selling parts of its U.S. TL operations for $525MM.
The deal is expected to close in Q3/22. We view this transaction as a
strategic positive and in line with the company’s messaging.
Details Of Transaction: TFII has signed a definitive agreement to sell CFI’s
Truckload, Temp Control and Mexican non-asset logistics businesses (CFI
TL, TC & MX Business) to Heartland Express for $525MM. The CFI TL, TC &
MX Business operates primarily in the U.S.-based Conventional TL operating
segment of TFI’s Truckload segment and provides truckload service
offerings, including time definite dry-van truckload, long-haul and short-haul
freight transportation, reefer transportation and Mexico-based non-asset
logistics services. The CFI TL, TC & MX Business has ~2,000 tractors,
~7,800 trailers and ~2,800 employees. CFI’s Mexican logistics business has
a network of nearly 200 C-TPAT certified Mexico carrier partners. TFI is
keeping the Dedicated and U.S. Logistics (non-asset U.S.-based logistics
services provider) divisions.
Financial Implications: The CFI TL, TC & MX Business generated
~$450MM in revenue before fuel surcharge and operating income of
~$50MM in 2021. This implies a transaction multiple of 10.5x EBIT. If we
assume a proportional split of TL D&A, this transaction implies an
EV/EBITDA multiple of ~5.3x. TFII noted that post this transaction its 2022
EPS guidance is unchanged ($8) and its pro forma funded debt-to-EBITDA
ratio declined to ~1.0x from ~1.3x as of June 30, 2022. The CFI TL, TC & MX
Business is the most capital intensive in the TFI portfolio. TFI will retain its
Dedicated and U.S. Logistics businesses. For the Dedicated business,
revenue and operating income for the TTM period ending Q2/22 was
~$401MM and ~$21MM, respectively. For the U.S. Logistics business,
revenue and operating income for the TTM period ending Q2/22 was
~$146MM and ~$11MM, respectively.
Positive Read-through From Transaction: We view this transaction in a
positive light. TFII had indicated previously that it was evaluating its portfolio
and we viewed the sale of some or all of its U.S. TL assets as a likely
outcome. Our key takeaways from this transaction are:
1. Consolidated Financial Metrics Will Improve: TFII’s U.S. TL operations
suffered from a structurally higher OR than its other main segments. For
reference, U.S. TL OR in H1 was north of 90% (excluding asset sales)
versus sub-80% in P&C and Canadian LTL and sub-90% in Canadian and
Specialized TL. And while TFII saw a path to lowering its U.S. LTL OR
from ~100% a year ago to ~80% in the next 12 to 18 months, it did appear
that the U.S. TL OR had hit a glass ceiling of ~90%. Similarly, from an
ROIC perspective, U.S. TL was in the mid- to high-single-digit % range
versus the rest of TFII’s portfolio in the mid-teen % to north of 20% range.
From a FCF conversion perspective, the CFI TL, TC & MX Business is the
most capital intensive in the TFII portfolio, suggesting the sale of these
assets should drive higher FCF conversion.
2. Positive Valuation Implications: We would argue that the assets being divested by TFII
are its most cyclical and, as such, weigh on its consolidated multiple. For reference, TL
players are trading at 5.8x consensus 2023E EBITDA versus LTL players at 9.6x. We
see this transaction as a tailwind for TFII’s multiple. TFII is trading at 7.2x our 2023E
EBITDA.
3. Creating More Balance Sheet Room: With TFII’s pro forma leverage ratio now down to
~1x, we regard the company as positioned to execute on a larger transaction over the
next 12 months. Total pro forma liquidity at the end of Q2 is now ~$1.3B. We expect the
company to continue to look to grow its LTL franchise, which we view as a strategic
positive given it is a top five North American player today with opportunities to expand its
geographic reach and increase route density. We view the LTL segment as being less
cyclical and operating in a more rational competitive environment. In the interim, TFII now
has additional dry powder for its share buyback program. Recall, TFII amended its
normal course issuer bid (NCIB) to repurchase for cancellation up to 8,798,283 common
shares until the expiry of the NCIB on November 1, 2022, representing 10% of the
company’s public float of 87,982,839 common shares as of October 22, 2021. The
current maximum under the original NCIB was 7,000,000 common shares. As at June 30,
2022, and since the inception of this NCIB, TFII has repurchased and cancelled
4,365,041 common shares, of which 2,629,441 were repurchased and cancelled in the
second quarter.