Secure goes for IPO, becoming first logistics company to do so

In what will be a first for the sector in Pakistan, a logistics company in Pakistan is set to be listed on the Pakistan Stock Exchange (PSX). The book building process of Secure Logistics Group completed and the strike price decided for the Initial Placement Offer (IPO) is at Rs. 12 per share with a subscription of 50.7 million shares being subscribed. 

The book building process took place on 27th and 28th of March 2024. The company wants to issue 50 million shares and raise Rs. 600 million from the public offering which will make up 18.27% of its shareholding after the IPO is carried out. The base price for the issue was set at Rs 12 per share after which the book building process has determined the actual strike price at which the IPO will be subscribed. 

It is important to note that the company had filed for a listing back in 2022 for nearly 56 million shares at a floor price of Rs 27 per share. In the older prospectus, the company was looking for more than double the investment which has been revised downwards in the latest prospectus. The previous request for listing was revised and a new prospectus was approved by the Pakistan Stock Exchange (PSX) to go for an issue of a smaller size and value.

So what is Secure Logistics, what does it do, and why are they going public now?

Secure Logistics Group

Secure Logistics Group Limited, formerly Asia Capital Partners (Private) Limited, is a company which is involved in the logistics industry and specializes in transportation of goods in long-haul category. The company is an umbrella corporation which owns SecurLog (Private) Limited, Secure Track (Private) Limited, Fist Security (Private) Limited and TDM (Private) Limited. These entities are involved in logistics, asset tracking, vehicle fleet management, security services and commodity trading businesses. The company considers long haul services its major revenue generator as more than 90% of its revenues come from this category.

At this point in time, there are no listed companies which are associated with this sector and most of the industry is characterized by high levels of competition with the leading companies having a market share of less than 2%. The landscape is primarily made up of family run and owner owned businesses which have an average fleet size of 70 to 100 vehicles. Some of the leading names in the industry are Allied Logistics, BSL (Private) Limited, DHL Global Forwarding Pakistan (Private) Limited, TCS (Private) Limited and National Logistics Cell.

Purpose of the IPO

The company’s current objective is to deleverage significantly by using the proceeds from the IPO to pay off its debt obligation. This strategy aligns with the goal of shielding the company from the financing costs associated with the historically high interest rates. The loan to be repaid is owed to its sponsors, while the amount owed to one of the sponsors, Karandaaz Pakistan, is to be converted into equity worth Rs 237 million. Additionally, a portion of the funds will be allocated towards upgrading the fleet, enhancing human resource capacity, marketing, and expanding the company’s market outreach.

Recent consolidated results show that the company has improved its sales and revenues with the recent year expected to cross Rs 2 billion in terms of revenue.

Apart from the interest rates, one of the biggest risks that the business is exposed to is a potential rise in fuel costs. As an expense, the company considers 55% of its cost only associated with fuel charges with toll expenses and depreciation coming in at 20% and 15% respectively. This means that any change in international oil prices will pose a threat to the company’s bottomline. 

However, Secure Logistics is able to deal with these costs by transferring the impact on to their customers. Due to this, the company enjoys a high gross profit margin allowing it to retain around 40% of its revenues as profits. The operating profit margin and net profit margin are also healthy and shows that the company earns, on average, 30% in terms of operating profit margin and 20% net profit margin.

Industry experts

As this is a new sector that is being ventured into, many of the brokerage houses are not covering the company or the sector as a whole. Still a general sentiment is that due to the slowdown in the economy, high energy cost and load axle implementation, the sector is facing difficulties.

In company specific analysis, even though the track record of the company seems to be consistent, industry experts feel that the industry is saturated to an extent. The logistics industry is seen as being fragile while operating in a volatile economy. They also point towards the fact that the company is looking to pay off its debt and deleverage itself by spending more than 85% of the proceeds on debt servicing which could be better used by expanding and improving the fleet. There is also a concern that the current fleet of the company is 37 vehicles which is far less than the industry average of 70 and needs to be supplemented to enhance revenue potential.

There is also a word of caution in terms of the risks that the company will face as this is the first IPO in the market of a logistics company and a comprehensive understanding of all the risk factors will need time to surface.

Mohammad Aitazaz Farooqui, Head of Research at Providus Capital, feels that the company is asking for a multiple that is five times its floor price which is based on past IPO share subscriptions. “I think the lucrativeness of the scrip is low given the cheap valuations available in the market. Plus the purpose of the issue is to pay off debt rather than invest in the business.” He points towards the fact that investors would be comfortable with a mix of debt and equity to amplify their return, however, the company is prioritizing debt payment currently.

The strategy has also been met with skepticism by some analysts due to the impending monetary easing cycle, with interest rates anticipated to decrease by 4% to 6% in the next twelve months. This reduction would lead to a decrease in the company’s finance costs.

On the upside, Secure Logistics has been able to secure contracts with companies like Fatima Fertilizers, National Foods and other FMCGs which secures a stream of revenues into the future. The company is earning 53% of its revenue from these corporate clients and they can further capitalize on this with better management. 

This, however, also poses a threat to the company’s stability. As per an IPO note issued by AKD securities, “The company, operating under exclusive agreements with the majority of its customer base, sees approximately 40% of SecurLog’s revenues dominated by top nine clients, indicating risks associated with concentrated revenue streams.”

The payment of debt would also be positive as it will mean that the company can see better profits. This, coupled with ample liquidity, would allow the company to convert its sales into cash in considerably less amount of time. The company has also shown robust growth and increasing margins which have stayed consistently high which bode well. It is also expected that as the economy starts to recover, the company can see higher sales linked to Large Scale Manufacturing and an ease in import restrictions which can boost the logistics industry.