FOOL ON THE HILL
If something seems too good to be true, it often is -- but it's hard to fault a debt-free business that produces sweet free cash flow and gangbuster sales growth. A.C.L.N. Limited, which sells and ships cars and trucks from Europe to 15 ports in 13 countries in North and West Africa, looks like a value -- though a few caveats about international investing are in order.
 |
|
|||||||
|
||||||||
|
||||||||
By
Wouldn't you love to know about a company that: Got one for you: A.C.L.N. Limited (NYSE: ASW). The company has two operations: Its logistics business, which moves cars and trucks door-to-door from vendors to customers, and its sales and distribution business of cars it buys wholesale. Cars are shipped from six ports in Europe to customers through 15 ports in 13 countries in North and West Africa and the Middle East.
The company's shares are attractively priced when valued by price-to-free cash flow and price-to-sales measures, but look like a screaming bargain when valued on a price-to-earnings basis: While the degree to which the shares seem attractively valued may vary based on the measure used, they nevertheless look appealing by almost any reckoning. The negatives No doubt about it, there are risks in international investing. Anyone interested should check out Bill Mann's review of the challenges and dangers. With his years of owning and running a business in Russia -- and traveling through Asia and the Middle East for that work -- he has some firsthand experience. It sells cars. And demand is very strong. Look at the increasing sales momentum just this year, fueled in large part by its new wholesale business: It does business in Africa, in developing economies with often unstable governments. But many of the countries are embracing GATT and lower tariffs. The company takes payment in major world currencies in advance, so the customer is left to navigate the local bank issues of convertibility. The sales figures speak for themselves. Governments are notoriously bureaucratic throughout the continent. It is probably reasonable to assume that dealing with officials is not entirely what one would expect in certain northern industrial ports. I say that not wanting to wade into any thicket of politics or culture, but noting various surveys of business corruption that give African nations poor scores, and the highly anecdotal experience of myself -- shipping my household effects to and from Kenya, though that is East Africa -- and dozens of my expatriate friends throughout the continent. While U.S. law restricts its corporations from paying bribes, I am unfamiliar with similar laws in other countries, whether Belgium or Cyprus. I am in no way saying that A.C.L.N. engages in any criminal activity, but investors in companies who do business in countries must make their own conclusions. As an owner of A.C.L.N., I am encouraged by the company's track record of growth and success, which has spanned more than two decades of change in African governments and economies. What do we know about management? Why does this have to be a public company? Management seems clear that their responsibility is to shareholders. The cash balance is growing well even after paying Malaysian builders for new cargo ships. Officers on a recent earnings conference call said they were evaluating acquisitions and understand that the money must either be deployed or paid out in dividends. Long-time shareholders probably aren't complaining, though: The stock has appreciated 479% from its June 29, 1998, opening-day close. A.C.L.N. presents an attractive risk-reward equation, but its business and markets mean that investors may take some convincing to buy into this cash-generating machine. Tom Jacobs (TMF Tom9) bought way too much marked-down chocolate at Trader Joe's on Friday. And then ate it. At press time, he owned shares of A.C.L.N. Limited. He owns other stocks, too, as you can see on his profile. The Motley Fool has a disclosure policy.
This is a very profitable business. While both of the company's businesses are growing, the key injection came with the addition of the wholesale auto side in 2000, which boosted total revenues 72% and EPS 73% in the first year. Revenues and earnings are growing rapidly, and net margins show strong expense management -- though the company benefited from incorporation in Cyprus and a 5% tax rate. Look at the numbers (dollar values in millions, except for per-share numbers): 2001 2000
Revenues Q2 Q1 Q4 Q3 Q2 Q1
Auto Sales $42.5 33.0 23.0 22.7 19.8 20.4
Logistics 36.4 30.0 26.5 27.6 20.0 8.2
Total 78.9 63.0 49.5 50.3 39.8 28.6
Sequential
Change 25% 27% -2% 26% 39%
Annual
Change 98% 120%
FCF $5.7 20.0 10.0 1.4 16.8 12.8
EPS $1.21 0.92 0.71 0.85 0.74 --
Long-Term
Debt $0
Gross
Margins 27.4% 25.2 24.9 28.4 30.4 --
Net
Margins 22.6% 21.7 21.3 24.9 26.9 -- Ratios
Share Price (10/12/01): $37.75
Market Cap.: $534.6M
FCF* $37.1M P/FCF 14.2
Sales $241.8M P/S 2.2
EPS $3.69 P/E 10.2
*Numbers for trailing 12 months
I can just see some people shaking their heads: "If A.C.L.N. is such a bargain, why isn't everyone buying?" Good question.
It's a foreign company.
This is a foreign company, incorporated in Cyprus and operating in Belgium. Even though the company files SEC Forms 6-K so we can review its financials, foreign accounting adds a variable to a process that's already a challenge when applied to U.S.-based companies. On the other hand, being incorporated in Cyprus means the company pays negligible taxes in the low single digits -- U.S. corporate taxes are generally in the range of about 35% -- meaning more operating profit can flow to the bottom line.
Is there any less attractive business, at first glance? (Well, perhaps airlines or car manufacturing.) Don't car salespersons conjure up images of most people's worst experiences, the Saturn experiment notwithstanding? Yet A.C.L.N.'s car business appears to be very, very profitable, and its founders have had 22 years to build a wide moat in the complex relationships needed to navigate African nations' Byzantine import/export bureaucracies. Vehicles Shipped
Period 2001 2000 % Change
Q3* 48,000 35,000
Q2 51,000 26,153 95%
Q1 36,349 16,430 122%
*2001 Q3 numbers for two months, 2000 numbers for three months
A cursory Web search for data on African economic development produces some depressing results overall, though World Bank data for 1997-1998 shows some growth -- particularly in West Africa (though not Nigeria, which since then has profited from increased oil prices). It's tough to get reliable data, but it's safe to say that most nations lack enough foreign investment and currency, and historically have used protective tariffs (allegedly) to safeguard their few fledgling export businesses.
What about the Sept. 11 attacks and aftermath?
According to the company, there is no effect on the company's business from the current terrorist conflict. There have been no reports of disruption to shipping lanes, and the West African countries at least for now do not appear to be targets of U.S. anti-terrorist action -- though northern African nations with significant Islamic populations may well join the small early protests, such as this weekend's in Kano, Nigeria.
A.C.L.N. maintains that its business continues to grow after the attacks, and today announced that it added two new European origination ports to its current four. A boatload has already left the first, in Germany, for Lagos, Nigeria, and the company says the other, in the U.K., will help with its plans to enter other such right-hand drive markets as East Africa, South Africa, and India.
The two top officers have been in the business since 1979, and founded A.C.L.N. in 1988. The company began trading on the Nasdaq in 1998 and moved to the New York Stock Exchange this year. Going public offers a double-edged sword: It may simply have been a way for the two top officers to cash in on their years of working in the business, which is not unusual for a small or family-held business. But to make the new shareholders happy, going public probably needs to be part of a process of planning for a transition beyond the founders. A business built largely on management's years of relationships in Nigeria and elsewhere will need to prepare for its eventual future without them.
RSS Headlines
Fool UK
