Royal Wolf: Hard To Contain The Enthusiasm
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With Australia’s largest fleet of containers, Royal Wolf is highly exposed to industrial and mining demand, but the company is working assiduously to diversify its customer base here and in New Zealand.
Royal Wolf Holdings Limited (RWH) is a great example of a company that specialises in a niche business. Royal Wolf sells and hires shipping containers - but not only for shipping purposes.
Invented in the 1950s, the humble shipping container can be used for a lot of different things: storage, accommodation, construction, retail, hospitality. Cut a hole in the side of one, add a bar, a fridge and some wooden shipping pallets for seats, and you have a funky - and portable - Melbourne bar.
Shopping malls made of shipping containers can be found from New York to Christchurch. Google has a floating Google Glass showroom made from containers. The United States Defense Advanced Research Projects Agency (DARPA) has designed a Tactically Expendable Marine Platform (TEMP) that links containers like Lego bricks to form a floating platform-cum-bridge that can be used in defence and disaster relief. There is even a branch of architecture that specialises in how to use containers - “cargotecture.”
Non-shipping use of containers is exploding around the world, given their solid construction, portability and cost-efficiency of modification. Royal Wolf is front-and-centre of this trend, augmenting its container sales and hire business with a division that modifies containers to suit customers’ needs.
Royal Wolf acquires the containers from China, or discarded units from shipping companies and then refits them for uses such as mobile offices, mine-camp accommodation and pop-up restaurants – even low-security cells in Victorian jails. The company loves shipping containers so much that its headquarters buildings in Melbourne and Auckland are made out of them. Its major markets include portable storage, retail, accommodation, freight, mining, construction, and events.
Royal Wolf is organised into four businesses:
• Storage Containers: provides used or refurbished containers in 8', 10', 20', and 40' dimensions.
• Portable Buildings: Portable Buildings can be used for a variety of applications in domestic, business and industrial settings. The portable buildings are typically 20' or 40' however units can easily be combined or stacked to create larger buildings as required.
• Specialty Products: includes dangerous goods storage containers, hoardings/gantries, refrigerated containers and explosive magazines. Royal Wolf also offers custom-design containers.
• Modifications & accessories: Royal Wolf offers container modifications and a range of accessories that can be added to transform a container to suit customers' needs.
Portable storage is the company's largest segment, while portable buildings is the fastest growing segment.
With Australia’s largest fleet of containers, Royal Wolf is highly exposed to industrial and mining demand, but works assiduously to diversify its customer base here and in New Zealand. At FY13 year-end, the company had about 21,300 customers across 19 different industries: the largest customer accounted for 3% of total revenue and the 50 largest companies represented less than 30% of total revenue.
This diverse exposure helps to mitigate the risk and volatility of Royal Wolf’s earnings profile. The lease fleet of 39,183 containers is deployed through 28 customer service centres across Australia and New Zealand.
In FY13, Royal Wolf lifted revenue by 8.6% to a record $149.4 million, and net profit by 26.6%, to $14.7 million. For the year it paid an unfranked dividend of 9.5 cents.
Royal Wolf is trying to expand its recurring revenue base, which is less volatile than sales revenue and generates a higher margin. Lease revenue ran at 48.3% of revenue in FY13, up from 43.9% in FY12. Lease revenue rose 19.3% for the year. The main drivers of lease revenue growth were the freight sector and remote-site camps for the resources and oil and gas sectors. However, fleet utilisation declined from 84.2% to 81.6%.
Earlier this month, Royal Wolf reported record revenue for the half-year to December 2013, up 22.7% to $88.4 million. This was helped by a single sale worth $12 million, made to Aurizon: this sale caused leasing revenue to slip to 44%. An unfranked interim dividend of 5 cents a share was paid. Royal Wolf expects franked dividends to commence in FY15.
For the half-year, Portable Buildings increased revenue by 53.3%; while Freight revenue more than tripled to $19.2 million. Portable Storage saw revenue slip 4.8% to $51.8 million.
The balance sheet was strong at the half-year, with net assets of $147.1 million, net debt-to-operating earnings standing at 2.5 times and interest commitments covered more than 10 times.
Royal Wolf is focused on expanding the uses for its containers, as stated in its corporate motto: “you can do anything in a Royal Wolf.” The company is a strong supporter of demonstrations of this, for example the Eat Street Markets in the Brisbane riverside suburb of Hamilton, for which Royal Wolf supplied more than 50 shipping containers. The markets recreate the bustle and flavours of a South-East Asian night market, and have proven a hit with locals and tourists alike.
Royal Wolf was established in 1995 and acquired by General Finance Corporation (GFN) in 2007. The company listed on the ASX in May 2011, at $1.83 a share, with GFN retaining a shareholding of 50%. The stock has moved to $3.21, with a peak of $3.77 in September 2013: having run so strongly, investor fears of a slowdown in the resources industry hit RWH. But the market is slowly warming to the stock again, heartened by the greater diversity of revenue sources that CEO Robert Allan and his team work so hard to build.
Expected by consensus to earn 18.2 cents a share in FY14 and pay a dividend of 10.3 cents, Royal Wolf is trading, at the price of $3.20, on a prospective price/earnings (P/E) ratio of 17.6 times earnings and a dividend yield (unfranked) of 3.2%. The consensus target price (of four covering brokers) is $3.31, which gives 3.5%, but Credit Suisse is a bit more impressed: it sees Royal Wolf moving to $3.55, which is almost 11% away. This is a very well-managed business that looks to be in a sweet-spot of a growing market.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au