Is FM Global an investment opportunity?

Value Investing Case Study 70-1: A fundamental analysis of FM Global Logistics Holdings Bhd to see whether it is a value trap or an investment opportunity.

Logistic companies are involved in transporting, warehousing, and distributing goods. When the economy is strong, there is typically higher demand for goods. Conversely, during economic downturns, demand for goods tends to decrease resulting in less demand for logistic services.

This makes logistic companies cyclical. I focus on cyclical companies when investing because the cyclical nature makes it easier to project performances.

You should not be surprised to find me hunting for logistics companies such as FM Global Holdings Bhd (FMGL or the Group). Established in 1988, FMGL quickly became a leading name in international freight services.

Join me as I dive into the numbers and discover the true story behind one of Malaysia's logistics titans. My analysis showed that despite its impressive growth and stronghold in the Malaysian market, FMGL's recent performance raises serious questions.

With declining revenues, efficiency concerns, and an uncertain global freight market, the once-mighty logistics provider seems to be navigating through stormy seas. While it is not a value trap, I would consider it a cigar-butt investment opportunity.

Should you still buy it? Well, read my Disclaimer.

Company background

Operating performance

Financial position

Valuation

Conclusion

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Company background

Established in 1988, FMGL touted itself as a preferred international freight services provider headquartered in Malaysia.

The holding arm of the Group, FM Global Logistics Holdings Bhd, was first listed on the Second Board of the KLSE in February 2005. It was transferred to the Main Board in December 2007, making it one of the first Malaysian-owned freight services companies to be listed on the Main Board of Bursa Malaysia.

The Group today covers 127 countries with the help of agents worldwide. It has a team of more than 1,800 logistics professionals across 9 Group offices and 42 regional offices.

In 2021, the Group consolidated its integrated logistics into two segments:

International Freight. This encompasses sea freight, air freight, and land freight services, including cross-border trucking services.

Domestic Logistics. Within this segment, the Group’s services include warehousing & distribution, and supporting services. These services extend to customs brokerage, haulage, e-commerce fulfillment, and last-mile delivery.

The Malaysian operations are the biggest revenue contributor. In 2024, it accounted for about 70 % of the Group’s revenue.

Note: The Group has its financial year end as Jun. The result for 2024 was based on the unaudited result from TIRK.com. The years referred to in this article refer to the financial years.

Chart 1: Revenue by Geographies

Note: The International revenue was derived by subtracting the Malaysian revenue from the group revenue. It included the inter-co elimination.

Operating performance

To get a sense of where the business is heading, I looked at the topline, bottom-line, and capital efficiency trends from 2013 to 2024. Refer to the left part of Chart 2.

Over the past 12 years, revenue grew at 7.6 % CAGR. It peaked in 2022 before declining over the next 2 years.

According to the Group, in 2023 “global trade and external demand experienced a gradual decline, causing freight rates to plummet from previously elevated levels…international freight rates have dropped by more than 80% since peaking in late 2021, while statistics from MARTRADE indicated trade was lower by an estimated 14% YoY in the first half of 2023.”

The Group did not provide any explanation for the decline in revenue in 2024 compared to that in 2023. It makes me wonder about the transparency of the Group.

Except for 2020, the PAT trend generally followed a similar pattern as that for revenue. The drop in profit in 2020 was due to “losses from the Tug & Barge associate business and distribution operations. The deteriorating business environment also necessitated provisions for receivables and impairment of investments.”

You can see the impact of these on the gross profit margins in the right part of Chart 2.

Chart 2: Performance Index and Margins

Note: The 2024 gross profit margin was extrapolated assuming the same dollar SGA for 2024 as that in 2023.

The disappointing picture was that there were declining operating and capital efficiencies.

Operating efficiencies. Refer to the left part of Chart 3. The performance of the various metrics declined from 2013 to 2020. While the values seemed to have reached the worst in 2020, the 2024 values were lower than the respective values in 2013.

Capital efficiencies. Refer to the right part of Chart 3. Apart from the declining gross profitability, the capital turnover (revenue/total capital employed) values for most of the time were lower than the 2013 values.

Chart 3: Operating and capital efficiencies

Returns also did not show any improving trends. Refer to the left part of Chart 4. From 2013 to 2024, ROIC averaged 8 % while ROE averaged 9 %. The CFROIC was volatile suggesting that cash flow from operations was volatile

Given the current WACC of 7 % and cost of equity of 9 %, I would conclude that shareholders’ value was as best maintained over the past 12 years.

Referring to the right part of Chart 4, you can see that there is also no discernible trend for the contribution margin.

Chart 4: Returns and Operating Profit

Note to Op Profit Profile. I broke down the operating profits into fixed costs and variable costs.

Fixed cost = SGA, Depreciation & Amortization and Others.
Variable cost = Cost of Sales – Depreciation & Amortization.
Contribution = Revenue – Variable Cost.
Contribution margin = Contribution/Revenue

Peer comparison

I compared FMGL's performance with several Bursa logistics and transportation companies. You can see from Table 1 that FMGL is among the larger companies in the peer group. It achieved one of the better revenue growths over the past 9 years.

Table 1: Peer revenue

I also compared FMGL’s performance based on 4 key metrics – return on capital, EBIT margin, levered free cash flow margin, and EPS. Refer to Charts 5 and 6. I would rate its performance as average.

Capital and operating efficiency. When you look at the 4 metrics, you can see that its trendlines were relatively flat. I would interpret this as no improvement in capital efficiencies. The good news is that there is no decline either.

Profitability management. Apart from EPS, the Group’s performance did not stand out relative to its peers.

Value creation. Its better revenue growth rate and the EPS trendline suggest that it did better than its peers when it came to shareholders’ value creation.

Chart 5: Bursa Peer Comparisons – Return and EBIT Margin

Chart 6: Bursa Peer Comparisons – Free Cash Flow Margin and EPS

I also have a case study of another Bursa logistics company - Is CJ Century an investment opportunity? Have a look as it has a bit more details about the sector, market demand, and digital threats.

Summary

What are the key takeaways from the above analyses of the operating performance?

Despite touting its international focus, its Malaysian operations contributed more than 2/3 of its total revenue over the past 12 years.

Revenue grew at a 7.6% CAGR, peaking in 2022 before declining in 2023 and 2024. Profits generally followed revenue, with a notable drop in 2020 due to losses in its associate business and distribution operations.

There are no signs of improving capital and operating efficiency.

FMGL is among the larger companies with better revenue growth over the past 9 years. I would rate its overall performance as average compared to its peers.

AI Comparisons

As part of my assessment of using AI for fundamental analysis, I asked FinChat and Stock Market GPT whether FM Global Logistics is fundamentally sound.

FinChat stated that there was an error and could not answer my question.

Stock Market GPT answered as follows (details are summarized by me):

“Based on the financial data provided, I can provide the following analysis on the fundamental soundness of FM Global Logistics Holdings Berhad

Profitability – Profit margin, EBITDA margin, ROE, ROA.

Liquidity – Current ratio, quick ratio.

Leverage – DE ratio.

Growth – Revenue growth, earnings growth.

Valuation - PE and PS.

Based on the above analysis, the company appears to have a mixed fundamental profile. While it has a healthy liquidity position and moderate leverage, the profitability metrics are not exceptionally strong, and the recent earnings growth has been negative. The valuation ratios suggest the stock may be undervalued, but this needs to be considered in the context of the overall financial performance.

Overall, the fundamental analysis indicates that FM Global Logistics Holdings Berhad has some strengths, but also areas that need improvement or close monitoring. Investors should further examine the company's strategic position, industry dynamics, and management execution to make a more comprehensive assessment of the company's fundamental soundness.”

The AI comments suggest that while currently the AI could identify the trends, it had yet to tap into the Management and Discussions Part of the Annual Reports to find the explanations.

Financial position

I first consider the overall picture via the capital allocation plan and the Reinvestment rate. Thereafter I zoomed in on the profitability, efficiency, liquidity, and leverage.

On such a basis, I would rate its financial standing as good. The main negative points were the declining efficiencies but these were more than offset by the following:

FMGL has a good capital allocation track record. Refer to Table 2. The cash flow from operations was sufficient to fund its CAPEX and acquisitions. Excess was used to reduce debt and returned to shareholders as dividends.

Over the past 12 years, it had an average Reinvestment rate (Reinvestment/NOPAT) of 10 %. This is a good rate as a big part of its NOPAT could be returned to shareholders. I defined Reinvestment = CAPEX & acquisitions – Depreciation & amortization + increase in Net Working Capital.

Table 2: Sources and Uses of Funds 2013 to 2024

In the context of liquidity and leverage, the results in Table 3 show that it did well. This is supported by the following:

Over the past 12 years, it generated positive cash flow from operations every year.

Over the past 12 years, it generated RM 492 million cash flow from operations compared to its PAT of RM 318 million. This is a poor cash flow conversion ratio.

As of the end of June 2024, it had RM 92 million cash, equal to 11 % of its total assets.

Its average Debt Equity ratio over the past 3 years was less than 1 with a good interest coverage ratio.

Table 3: Financial Position

Valuation

I looked at several valuation metrics to assess whether there is a margin of safety. Refer to Table 4.

You can see that there are 26% and 15 % margins of safety under the Asset Value and Intrinsic Value respectively. However, they are less than my target of 30%.

The Acquirer’s Multiple of 5.5 indicates that it is a cheap stock.

But the Free Cash Flow yield of 2% is not good enough.

Overall, I would wait for the price to drop further before considering it an investment. Given its fundamentals, I would consider this a cigar-butt type of investment rather than a “wonderful” company.

Table 4: Valuation metrics

Notes

a) EV / EBITDA. A ratio less than 6 is considered cheap.

b) Free cash flow/market price.

In estimating the intrinsic value, I worked on the basis that FMGL is a cyclical company.

According to Damodaran, extrapolating the performance of cyclical companies using the current performance can lead to mis-valuations. He suggested to based it on the performance over the cycle.

One way to do this was to use the current revenue and then multiply it by the cyclical margins to derive the cyclical earnings. Accordingly, for FMGL:

I used the 2024 revenue to represent the current size of the business.

I used the average 2013 to 2024 contribution margin and capital turnover to represent the performance over the cycle.

The result is an Earnings Value that is about the same as the Asset Value as shown in Chart 7. You would expect such a situation in a competitive environment where there is no strong moat for the company.

Chart 7: Valuation

Intrinsic valuation model

I valued FMGL using a single-stage Free Cash Flow to the Firm model.

Value to the firm = FCFF X (1 + g) / (WACC – g).

FCFF = EBIT(1 – t) X (1 – Reinvestment rate).

EBIT = Revenue X Contribution margin – Fixed cost. This was based on the operating profit model as shown in the right part of Chart 4.

g = 4 % based on the long-term GDP growth rate.

The reinvestment rate was based on the fundamental growth equation.

Table 5 illustrates the calculation.

There are 4 key parameters in my model.

Revenue. I assumed this to be the 2024 revenue.

Contribution margin. I assumed the average 2013 to 2024 margin to represent the performance over the cycle.

Capital turnover (Revenue/TCE). I assumed the average 2013 to 2024 value to represent the performance over the cycle.

WACC. I derived this based on Damodaran’s approach with a Beta of 0.73 and a risk-free rate of 2.4 %.

Table 5: Sample calculation

Case Notes

Investing in logistics companies comes with specific risks and challenges. Here are some critical factors to watch out for:

Cyclical industry. The logistics sector is highly cyclical and closely tied to global economic conditions and trade volumes.

Volatility in freight rates. Freight rates can be highly volatile, influenced by factors such as fuel prices, supply-demand imbalances, and geopolitical events.

Operating efficiency. Logistics companies operate on thin margins, making operational efficiency critical.

Capital intensity and debt levels. The logistics industry requires significant investment in infrastructure, vehicles, technology, and facilities.

Technology disruption. The logistics sector is undergoing rapid technological change, with advancements in automation, AI, and digital platforms reshaping the industry.

Geo-political risks. Logistics companies operating internationally are exposed to geopolitical risks such as trade wars, tariffs, sanctions, and political instability.

Investing in logistics companies requires a careful analysis of the industry’s inherent risks and the specific challenges faced by each company.

As can be seen from the above, there are many factors to consider. One way to get a grip on this is to look at what others have done. Sites like Seeking Alpha* is a good source of such information. Click the link for some free stock valuation examples. If you subscribe to their services, you can tap into their business analysis and valuation.

Risks and limitations

There are 2 key issues when looking at my valuation model:

Base revenue.

Growth rate.

In my valuation, I assumed that the 2024 revenue was the base revenue. If I had assumed that it was based on the past 3 years' average revenue, the intrinsic value would increase to RM 2.31 per share. This would result in more than 30% margin of safety.

The question then is whether the past 3 years' average revenue is more reflective of the picture. If you look at Chart 8, you can see that the freight rates in 2022 were extraordinary compared to those for the pre-2021.

Even the rate in 2024 is relatively high compared to those for pre-2021. As such I would think that the average past 3 years average revenue is a very optimistic one. In other words, the 2024 values is a better representation of the base revenue that the past 3 years average revenue.

Chart 8: Freight Index

Sources: Trading Economics for the left chart and Hakovo for the right charts.

Next, in my valuation, I assumed a 4% growth rate compared to the 7.6 % CAGR in revenue from 2013 to 2024. A higher growth rate (assuming the same Reinvestment rate) would lead to a higher intrinsic value.

But I think a 4 % growth rate is realistic given the market demand as exemplified by the following:

“Malaysia Freight…The logistics industry is projected to grow from USD 28.93 Billion in 2023 to USD 43.39 Billion by 2032, exhibiting a compound annual growth rate (CAGR) of 5.20% during the forecast period (2024 - 2032)” Market Research Future

“The Malaysia Freight And Logistics Market size is estimated at USD 27.81 billion in 2024, and is expected to reach USD 35.10 billion by 2029, growing at a CAGR of 4.77% during the forecast period (2024-2029).” GII Global Information

Conclusion

FMGL shows some red flags:

Declining revenue and profitability. After peaking in 2022, both revenue and profitability have shown a downward trend. The lack of transparency regarding the 2024 revenue decline further adds to the uncertainty.

Stagnant efficiency metrics. The company's operating and capital efficiencies have not improved over the past decade.

Average peer performance. Although FMGL has outpaced some of its peers in terms of revenue growth, its overall performance in other metrics like return on capital, EBIT margin, and free cash flow margin is average at best.

Valuation concerns. FMGL might appear cheap based on the Asset Value and Earnings Value. But the lower-than-target margin of safety and low free cash flow yield suggest caution.

Given these factors, I would not classify FMGL as a compounder. While there are some red flags, I would not classify it a a value trap because it is a profitable company. There is nothing to suggest that it is going out of business.

Investment Thesis

The investment thesis for FMGL rests on its established market position, diversified operations, and strong financial base. FMGL’s current valuation metrics suggest that the stock is undervalued from a cigar-butt investment perspective.

While there are some red flags, I would not classify FMGL as a value trap. The low Acquirer’s Multiple and potential for improvement in freight rates and market conditions could provide significant upside if the company can stabilize and grow its earnings. However, you should approach with caution, mindful of the need for improvement in efficiency and profitability.

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Disclaimer & Disclosure
I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.

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