This specialist contract hire stock is benefiting from the trend to relocate factories to lower-cost eastern European countries. And whilst the risks are high, so are the potential rewards.
Gamble of the week: Axis Intermodal (Aim:AXI)
Axis Intermodal is a specialist contract hire business, supplying equipment to the logistics industry from bases in the UK (representing 79% of sales) and Germany (21%). The company has a fleet of trucks (331), trailers (483) and swapbodies (2,853) – of which 80% are leased on long-term contracts (swapbodies are steel freight containers with folding legs). Providing an economical and environmentally friendly alternative to trailers, they are used extensively on the continent and can easily be transported by road, rail or barge. The majority of Axis’s customer base comprises freight groups (such as DHL) and large corporates that manage their own logistics.
On first impressions, the market for this type of equipment may not look very exciting. However, appearances can be deceptive; growth is being driven by the ongoing trend for relocating expensive factories in developed countries to their lower-cost neighbours in eastern Europe. This vogue has led to higher demand for transport services, which in turn has increased demand for Axis’s fleet and underpinned its profitable growth.
At the interims in September, the firm said that “demand for trucks and trailers in 2007 continues to be buoyant… fuelled by the improvement in the German economy and the new markets created by the expanded EU member states”. Executive chairman Robert Montague (who owns 29% of the firm) commented that “major European truck and trailer manufacturers are predicting that the current shortage of equipment will continue into 2009, and we are well positioned to take advantage of the demand”.
Investment research group Edison expects sales and earnings per share of £11m and 0.71p in 2007, rising to £13m and 1.37p in 2008 – putting the shares on an undemanding 2008 price/earnings ratio of 5.5. The balance sheet also looks sound, as much of the debt required to fund assets in Germany is provided by KG Partners. At the end of December, net debt is expected to be £1.6m, with interest payments covered a comfortable six times.
The main risk is Axis Intermodal’s relatively small size, since it is a niche player in a vast European market, supplying large customers and competing against industry heavyweights, such as GE Capital. The group is also dependent on some large contracts, which, if lost, could adversely affect results. Nevertheless, the stock is cheap, the management experienced and the company is expanding rapidly.
Recommendation: BUY at 7.25p (market cap £4.5m)
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