TSL in good performance but worrying cash-flows

TSL reported a 43 percent increase in operating profit to US$7,04 million in the year to October 2013  as the group continues to reap fruits of its new initiatives and sustainable operating costs.
The cash flow position of the company worsened in the period with a negative operating balance of – US$7,09 million from a positive US$840 085. Closing cash was a negative US$2.07 million from a positive US$3,2 million in 2012.

Chief executive Washington Matsaira told analysts recently the group’s results showed a positive signal that “things were moving in the right direction.”
He said the group would continue building on the pillars as outlined in 2012 of centering the business on Logistics, Agriculture and Real Estate. At the same time Matsaira announced that the group would have a new pillar; Trading, which is expected to complement growth.

“We are pleased with the results and bullish about the future,” said Matsaira.  The group will deepen the distribution offering under Logistics and introduce new services in rail. Matsaira said significant revenue was coming from warehousing.

He said they had looked at the Bak Business model in the first half of last year and positive results had reflected from the second half.
“Much better results are already showing in Q1 2014.”

The future growth of the unit will focus on the new services under distribution. The group will also seek to create closer links at the ports with existing shipping line partners.

“However the search for an appropriate strategic logistics partner continues.”
The group had also acquired Premier Forklifts to complement its logistics offering. “The forklift business has been a perfect fit and we are already seeing the fruits of that move.”

Avis performance had been impacted by a shrinking market. The vehicle replenishment programmed had been slowed in view of the lower demand. However Matsaira was hopeful the business will turn once tourists return to the country.

Analysts Comment – With a net asset value of US$66,2 million versus a market cap of US$128,6million TSL certainly looks somewhat overvalued.  TSL recently posted what will initially seem like good numbers, only but on the surface.

On closer analysis of the trading results, one quickly notices a few tell tale signs of a business in trouble. One obvious one is that were it not for the asset revaluations which pimped up the numbers, the reported performance would have certainly been much lower. If one looks at the group value as a sum of its parts, the market valuation of TSL versus group financial performance is simply not justified.

Say for example, in the event of an unforeseen event of liquidation investors will get at most US 50c for every dollar invested. This is because TSL is currently trading on the market at over twice its net book value. When one further considers the precarious state of the company’s cash flows which are heavily funded by short term credit facilities, the story saddens further.

The business is burning cash, with negative cash generation from operations only being covered for by the huge increase in borrowings. A company with a steady, consistent generation of free cash flow is a highly favourable investment quality and TSL fails many times to meet this basic criteria.

As much as it is important for a company to be profitable, it is equally critical that the company has good liquidity as this is a positive sign of good growth prospects. Free cash flows translate into better value as the company can pay investors (dividends) or fund future expansion and growth opportunities. – FinX.