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The Shyft Group (SHYF) represents a gorgeous funding alternative inside the last-mile supply specialty automobile manufacturing area of interest. Given its distinctive place as a number one producer of walk-in van (WIV) our bodies, the corporate stands to profit from favorable e-commerce tailwinds because of the 2020 COVID-19 pandemic and the secular shift in direction of omnichannel retail and digital nativity. Regardless of Shyft’s swift restoration from the COVID-19-related dip and modest TTM a number of enlargement, I consider Shyft’s share worth nonetheless has room to develop for 3 key causes, leading to a compelling alternative for prudent buyers to purchase a high quality enterprise that’s buying and selling 19% under its intrinsic worth (23% upside).
Enterprise Overview
Shyft is a distinct segment market chief within the manufacturing and meeting of business and leisure automobiles. Shyft produces walk-in van and truck our bodies utilized in e-commerce/final mile and grocery supply, vocation-specific upfit tools used within the cellular retail and utility trades, and luxurious Class A diesel motor residence chassis. Its automobiles, components, and companies are sold to business customers, authentic tools producers OEMs, sellers, and governmental entities. Shyft operates two enterprise models, unfold throughout 15 manufacturing areas in the USA:
Fleet Automobiles and Providers (FVS), which is marketed underneath the Utilimaster and Strobes-R-Us go-to-market manufacturers, manufactures and assembles walk-in van and truck our bodies for purchasers like UPS (UPS), FedEx (FDX), Amazon (AMZN), and PepsiCo (PEP). Stroll-in vans characteristic an aluminum physique assembled on a stripped truck chassis equipped with engine and drive practice parts. Truck our bodies, that are additionally constructed out of aluminum, are put in on chassis with completed cabs and are designed with cargo lengths starting from 10 to twenty-eight toes. Sometimes, chassis are already owned by end-customers. Shyft holds these on consignment and manufactures our bodies on prime. In situations when Shyft instantly purchases chassis, it often does so from suppliers like Ford Motor Firm (F) and Daimler AG.
The FVS enterprise unit generated $485m of income (internet of USPS pass-through) and $60m of adjusted EBITDA in FY19, accounting for roughly 75% of complete working income and EBITDA. It has grown at a CAGR of 16% since 2016 (50% YoY development over the prior two years), excluding $65m and $91m of USPS pass-through income in 2018 and 2019. (Observe: Adjusted EBITDA and Revenue are thought-about earlier than intercompany eliminations.)
Specialty Automobiles (SV) engineers and manufactures luxurious Class A motor residence chassis, offers contract meeting of protection automobiles, and because the acquisition of Fortress Assets, LLC (Royal Truck Physique) for $89.4m money in 2019, is the most important service truck physique producer within the Western United States. The SV enterprise unit generated $186m of income and $21m of Adjusted EBITDA in FY19 and $193m of income and $19m of EBITDA in 2018.
Efficient February 1, 2020, Shyft accomplished the sale of its loss-making Emergency Response and Automobile (ERV) enterprise for $55m money. The ERV enterprise consisted of cab-chassis and equipment manufacturing operations.
Roughly 97% of 2019 income was home to the USA. Basically all of Shyft’s income derives from contracts with prospects which might be fulfilled over 2 to 12 months, relying on the product.
Picture Supply: Utilimaster
Administration
The administration crew is led by Daryl Adams, CEO, and President, who joined the corporate in Q3 2014 as COO and was promoted to Chief Government Officer in February 2015. Previous to becoming a member of Shyft (Spartan Motors on the time), Adams served as CEO of the privately held Tier One automotive provider, Halfway Merchandise Group. Adams has been instrumental in main Shyft’s multi-year turnaround plan, which he applied in the beginning of his tenure. He has roughly $9.4 million of his private internet price invested within the enterprise and has persistently sought value-accretive initiatives (the acquisition of Royal Truck Physique and the divestiture of the ERV enterprise, for instance).
In accordance with Shyft’s most up-to-date 10-Okay, govt compensation relies on a single adjusted EBIDTA efficiency metric, which is benchmarked towards business friends within the sturdy items manufacturing business.
Funding Thesis
Thesis 1: International logistics corporations might want to reinvest of their fleets to satisfy accelerating e-commerce demand.
If service corporations intend to satisfy client demand for last-mile residential deliveries, then they might want to reinvest of their fleets. In its July 2020 e-Commerce Report, Goldman Sachs estimated that on-line buying quantity will develop by a CAGR of 19% till 2023. The report additionally famous that e-commerce penetration relative to home retail spending rose to greater than 40% in Could 2020, from 16% within the first quarter of 2019. This accelerating demand can already be seen within the earnings of corporations that profit essentially the most from e-commerce: UPS, FDX, and AMZN all beat Q2 2020 earnings by a minimum of 80bps.
Because the proportion of e-commerce to nationwide (and international) retail gross sales grows, so too will the necessity to buy, keep, and change supply automobiles. Previous to the COVID-19 pandemic, last-mile supply was already the fastest-growing fleet segment for carriers, however with the emergent want for social distancing and “contactless” transactions, funding on this specific area of interest has develop into much more crucial. Mike Antich of FleetFinancials notes that last-mile supply is often related to stop-and-go driving, prolonged idling durations, and better mileage – all of which take a major toll on supply automobiles. These automobiles are usually depreciated over a 10-year helpful life, however as they’re subjected to extra frequent wear-and-tear and better mileage, actual depreciation will possible speed up.
For multi-national logistics corporations, popularity and scalability are key to successful contracts. The walk-in van/truck physique upfit business is very fragmented between many small regional gamers, but when a nationwide distributor, like UPS, wants to exchange a fleet (1,000+) of last-mile supply automobiles, it has primarily two choices: Utilimaster or Morgan Olson.
Supply: SHYF Investor Presentation
Thesis 2: The FVS and SV enterprise models have traditionally earned excessive returns, however these have been obscured by the loss-making ERV enterprise.
Skepticism of the corporate’s future is comprehensible: turnaround investments are virtually at all times dangerous and infrequently rewarding. Between 2015 and 2018, the corporate’s initially reported EBITDA and internet revenue margin averaged 3.6% and 0.6%, respectively – not precisely a money cow – however I consider that historic filings grossly underrepresent the profitability of the FVS and SV companies.
Regardless of Shyft’s obvious unprofitability, a breakout of income and EBITDA by working unit for the interval 2015 – 2019 reveals the next:
1) After adjusting for the one-time FY18/19 USPS pass-through contract, we will see that the FVS and SV enterprise models have every grown by CAGRs of 16.3% and seven.0%, respectively.
2) The common 5-year adjusted EBITDA margins for the FVS and SV enterprise models are 10.1% and eight.5%, however complete FVS and SV adjusted EBITDA have every grown by CAGRs of 28.1% and 18.6% attributable to margin enlargement.
3) Utilizing the company-provided breakout of belongings by working unit, we will see that over the earlier 5 years, the FVS unit earned a mean EBITDA Return on Property (ROA) of 35.9% whereas the SV unit has earned a mean EBITDA ROA of fifty.7%.
4) Shyft’s common 3Y Return on Invested Capital (roughly estimated) is ~14%, which is considerably increased than the corporate’s Weighted Common Price of Capital (8.14%).
Supply: Writer Calculations | Information Supply: Capital IQ
Thesis 3: Though many gamers are getting into the electrical automobile last-mile supply market, as a market chief, Shyft is well-positioned to capitalize on secular traits.
The pattern in monetary markets in direction of electrical and different gasoline automobiles has resulted in quite a few startups and development corporations like Rivian, Hyliion (HYLN), Workhorse (WKHS), and Nikola Motors (NKLA) attaining lofty valuations – typically within the tens of billions. However regardless of noise brought on by new entrants within the EV area, Shyft has remained comparatively pragmatic. In reality, in Shyft’s presentation on the September 2020 Sidoti Digital Traders Convention, CEO Daryl Adams disclosed that the corporate is totally able to electrifying automobiles in all Lessons (1 by way of 7); demand from carriers simply shouldn’t be there.
However regardless of obvious low buyer demand, Shyft just lately expanded assembly line capabilities to help the manufacturing of as much as 5,000 Class 3-4 electrical automobile models per yr, with manufacturing scheduled to start in 2021. The corporate can be already producing Class 2 Velocity EV WIVs for 2 parcel supply corporations for route and efficiency testing. On condition that in September, Governor Newsom announced by way of Government Order that every one new passenger automobiles offered within the State of California are required to be zero-emission, the scalability of Shyft’s manufacturing will possible be a key driver for future development.
Shyft’s concentrate on the Class 3-4 phase of the last-mile supply area of interest differentiates it from its rivals. On the 2020 NTEA Work Truck Present, Morgan Olson revealed its new prototype Class 2 WIV, the Storm. Though this WIV would instantly compete with Shyft’s Class 2 Velocity/Attain our bodies, there does not seem like any proof on the Morgan Olson web site that the corporate is producing EV our bodies for increased weight lessons. For now, Morgan Olson’s EV manufacturing seems to be restricted to Class 2 automobiles.
Supply: SHYF Investor Presentation
Valuation
Base Case: It ought to be emphasised that my base case mannequin underestimates each ahead income and EBITDA in comparison with the analyst consensus. I don’t consider that consensus estimates correctly replicate the influence of COVID-19 and the ensuing chassis shortages amongst key suppliers. FVS income decreased by ~7.8% in Q2 2020, in comparison with the identical interval in 2019 (internet of pass-through), whereas SCV income declined by ~36%. This fall has traditionally been Shyft’s slowest quarter; due to this fact, it’s uncertain that the corporate will generate gross sales to make up for losses skilled within the first half of the yr. I’ve due to this fact accounted for a near-term downturn (-10%) in FVS and SV income for 2020.
Supply: Capital IQ estimates
I estimate that FVS income will develop by 20% in 2021, ultimately plateauing to fifteen% YoY development in 2024. Annual FVS income is predicted to achieve $816m by 2024; or, assuming a mean WIV worth of $77k, annual unit gross sales of roughly 10,600 vans. Mixture Firm-wide gross sales are forecast to achieve ~$1 billion by 2024.
Administration has been vocal about their intention to enhance Shyft’s adjusted EBITDA margin to >10% by way of the implementation of lean manufacturing and productiveness enhancements, in addition to the corporate’s transition towards a extra favorable product combine. The bottom case mannequin incorporates administration’s expectations. I estimate that Shyft will obtain a ten% adjusted EBITDA margin by 2023 and a 12% margin by 2024.
To account for acquisitions required to help development, capital expenditures are anticipated to stay between 2.5% – 3.0% of income (1.5% hist. 3Y common) within the base situation.
My base worth is roughly $25 per share, or a 22% upside, derived from a (WACC) of 8.14% and a terminal development charge of three%. To regulate for development within the SV enterprise unit, SV income is about at a continuing 7% (3Y Common) starting in 2021. 
Supply: Writer Calculations | Information Supply: Capital IQ
Bull Case: My bull case additionally displays a near-term downturn in FVS and SV income associated to the COVID-19 pandemic; nonetheless, gross sales will expertise a pointy rebound in 2021.
- Gross sales are anticipated to develop at a CAGR of 25% till 2024 attributable to accelerating demand for WIVs on EV chassis.
- COGS as a % of income is adjusted in 2020 to replicate near-term chassis shortages, however will get well to 78% by 2024 attributable to productiveness and provide chain enhancements.
- SG&A margin is about at 10% in 2020 to maintain mounted prices and overhead constant however will shortly get well to 7.5% by 2022.
My bull worth is roughly $37 per share, or an 80% upside, additionally derived from a WACC of 8.14% and a terminal development charge of three%.
Bear Case: The bear case additionally displays a near-term downturn in FVS and SV income associated to the COVID-19 pandemic; nonetheless, the restoration is predicted to take considerably longer.
- Shyft is predicted to lose market share to Morgan Olson or to a extremely scalable competitor (Amazon, Rivian, and many others.), leading to income development that’s considerably decrease than within the base or bull situations.
- Gross margin is closely impacted by chassis shortages in 2020, with fallout anticipated to final till 2024.
- SG&A margin is about at 12% in 2020 to maintain mounted prices and overhead constant however will get well to eight% by 2024.
My bear worth is roughly $14 per share, or a 30% draw back, additionally derived from a WACC of 8.14% and a terminal development charge of three%.
Assuming a 25/50/25 Bull/Base/Bear chance weighting, the probability-weighted share worth is about $25 per share: a 23% upside.
Supply: Writer Calculations | Information Supply: Capital IQ
Key Dangers and Uncertainty
Extended results of COVID-19 might adversely influence Shyft’s worth chain, each by way of chassis shortages (suppliers) and thru order pauses/cancellations (prospects).
Whereas that is actually a priority, order backlog for the FVS enterprise unit at Q2 2020 – which is a semi-reliable indicator of short-term demand – remained sturdy, growing by 18% to $287m in comparison with the identical interval in 2019. Additional dangers stay associated to chassis availability and the conversion of backlog to gross sales (supply-side). In 2018, Shyft was adversely impacted by chassis shortages attributable to worldwide tariffs, and uncertainty stays as as to if the corporate will expertise comparable provide shocks following the COVID-19 pandemic.
In Shyft’s Q2 2020 earnings name CEO Daryl Adams famous that in contrast to in 2018 when Shyft relied upon OEMs to produce chassis, the corporate’s current transition in direction of Class 3 automobile manufacturing implies that chassis at the moment are procured instantly from Ford and Freightliner (Daimler AG). By sourcing chassis from authentic producers with whom Shyft has long-standing relationships, moderately than from third-party OEMs, Shyft can climate some (however not all) of the supply-chain shocks which will have an effect on its business.
Amazon, which makes up a good portion of Shyft’s income, might try to vertically combine its provide chain by way of the event of their very own supply automobiles.
Amazon is infamous for buying or directly competing against key suppliers. Issues relate to Amazon’s funding in Rivian and its order to buy 100,000 EV vans by 2024. Ought to Rivian’s manufacturing appropriately scale to satisfy demand, the lack of Amazon as a buyer, in addition to the emergence of a brand new multi-billion-dollar competitor within the last-mile EV area, might negatively influence Shyft.
Working Mannequin Abstract
Supply: Writer Calculations | Information Supply: Capital IQ
Last Ideas
Given the corporate’s increasing margins, excessive charge of income development within the FVS enterprise, and advantageous place as a number one producer of walk-in van/truck our bodies, I view The Shyft Group as a compelling lengthy place for buyers seeking to capitalize on the secular theme of e-commerce. Key data that I will likely be on the lookout for in Shyft’s upcoming Q3 2020 earnings launch embody, A) whether or not the corporate continues to maintain the ~20% gross margin that it earned over the prior 4 quarters, and B) how the speed of backlog-to-revenue conversion has modified because of the financial reopening.
On a ultimate word, my working mannequin assumes that over the following 5 years Shyft might want to have interaction in a restricted variety of acquisitions to keep up market share (these are factored in capex). Traditionally, Shyft’s administration crew has accomplished a wonderful job pursuing value-accretive investments, however one thing to think about going ahead is whether or not acquisitions are accomplished for the sake of development (value-accretive) or for upkeep (value-destructive/capex). If Shyft can show that it is able to rising gross sales organically to satisfy rising e-commerce demand – with out the necessity for acquisitions – I’d be much more optimistic concerning the firm.
Because it stands, primarily based on present data, I view Shyft’s truthful worth to be ~$25 per share. I’d bump that as much as ~$30+ per share if the corporate demonstrates a swift restoration from the COVID-19 pandemic and excessive charges of natural development (starting in 2021). I consider that something under $16 per share (June/July buying and selling vary) is deeply underpriced.
Disclosure: I’m/we’re lengthy SHYF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it. I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
