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Daseke (DSKE) Merges In 2 Open Deck Trucking Companies & Reports 1Q Results

05/16/2017
By Steven Ralston, CFA

NASDAQ:DSKE

Summary

• Daseke Inc. (NASDAQ:DSKE) reported 1Q results. The top line was slightly better than our expectations, though reported earnings attributable to common stockholders were negatively impacted by one-time expenses which totaled over $5.5 million. 
o Management confirmed guidance for 2017: Adjusted EBITDA in the range of $95-to-$104 million and pro-forma Adjusted EBITDA of $140 million.
• The company continues to execute its strategy of consolidating premier open deck trucking companies within a highly fragmented market.
o Mergers with Indiana-based The Schilli Companies and Manitoba-based Big Freight Systems Inc. were announced on May 1st.
•Our indicated share price target remains $13.50, which is based on comparative analysis that utilizes the valuation metric of EV/EBITDA and targeting a second quartile industry multiple.

Two Mergers Announced

On May 1st, Daseke (DSKE) announced mergers with two open deck transportation companies: Indiana-based The Schilli Companies and Manitoba-based Big Freight Systems Inc. Combined, Schilli and Big Freight generated approximately $119 million in revenues and $13 million of Adjusted EBITDA during 2016. Schilli will expand Daseke’s presence in the Midwest while Big Freight will enlarge the company’s geographic footprint in the Canadian market. Schilli and Big Freight align well with Daseke’s configuration of asset-light scalable capacity with an estimated 40% of revenues being asset-light or logistics-related. Management continues to pursue a strategy of being the highly fragmented open deck trucking space.

The Schilli Companies offers open deck specialized transportation services, along with industrial warehousing and distribution solutions. Comprised of four operating companies (Schilli Transportation Services, Schilli Specialized, Schilli Distribution Services and Schilli National Lease), Schilli also provides export packaging and free trade zone access in Savannah, Georgia.

Big Freight Systems serves all Canadian provinces and 19 states of the U.S. Founded in 1948, Big Freight is an award-winning, top-tier safety-ranked open deck carrier that provides a more robust local presence in Canada. Several notable awards or recognition received by Big Freight include:
• 1997 Top 50 Best Managed Private Companies in Canada
• 2012, 2013 and 2014 Canadian Shipper's Choice Award
• 2014 Carrier Choice Award
• 2016 National Fleet Safety Award by Truckload Carriers Association in the Small Carrier Division 

The combined consideration for the mergers with Schilli and Big Freight Systems was $36.8 million, which consisted of $33.4 million in cash and 342,133 shares of DSKE (valued at $3.44 million). Daseke also assumed approximately $32.5 million of outstanding debt, which prices the transactions at 5.5 EBITDA. After the mergers, Daseke owns over 3,500 tractors and 7,300 trailers, along with1.1 million square feet of industrial logistics, warehousing and distribution operations.

Overview of Daseke’s Growth Strategy 

Daseke is poised for continued growth through additional mergers, bolstered by organic growth via operating and integration synergies along with positive industry trends (industrial output growth and capacity reduction from the ELD mandate). Since 2008, Don Daseke (the company’s founder and CEO) has been pursuing the goal of building the premier open deck trucking company. Daseke has created a national network of open deck trucking companies, a scalable platform with which to continue pursuing a strategy of consolidating premier open deck trucking companies within a highly fragmented market. The company’s record of growth in revenues and Adjusted EBITDA has been driven by a combination of strategic acquisition driven and organic growth strategies.

First Quarter Results 

On May 10th, Daseke Inc. reported results for the first quarter ending March 31, 2017. The company reported total revenues of $ $160.4 million, which increased 2.4% from $156.9 million in first quarter of 2016. The primary factor for the increase was the 39.8% increase in the fuel surcharge, which is a component of total revenue and designed to compensate for fuel costs above a certain cost per gallon.  According to the Department of Energy, the national average diesel fuel price during the first quarter of 2017 was $2.567 or 23.6% higher than the $2.077 average in the first quarter of 2016. The top line was slightly better than our expectations driven by 198,800 greater miles being achieved over the comparable quarter last year despite being partially offset by downward pressure on rates.

Adjusted EBITDA decreased 22.7% to $17.57 million from $22.72 million in comparable quarter last year. Management confirmed guidance for 2017 of Adjusted EBITDA in the range of $95-to-$104 million and pro-forma Adjusted EBITDA of $140 million.

Revenue generated by the Flatbed Solutions segment increased 6.9% to $81.3 million, primarily due to a 45.8%, increase in fuel surcharge revenue. On the other hand, the revenue of the Specialized Solutions segment decreased 1.1% to $80.7 million as a 33.6% increase in fuel surcharge revenue did not fully offset the change in load mix to lower margin loads.

Salaries, wages and employee benefits expense decreased 0.5% to $50.1 million, primarily due to lower healthcare benefit costs, which was partially offset by increased compensation for drivers in both the Flatbed Solutions and Specialized Solutions segments.

Total fuel expense increased 32.6% (or $4.7 million) to $19.2 million, primarily a result of higher fuel prices and a 0.3% increase in total miles. Operations and maintenance expense increased 12.2% (or $2.5 million) to $23.2 million versus the comparable quarter last year as tractor lease costs increased in both segments.

Interest expense increased 10.2% (or $0.545 million) to $5.90 million, primarily attributable to borrowings for acquisitions and equipment. Total Other Expense (which includes the aforementioned interest expense) increased 83.9% due to the write-off of unamortized debt issuance costs of $3.9 million, which were incurred upon refinancing of debt as part of the business combination with Hennessy Capital Acquisition Corp. II consummated on February 27, 2017. 

For the first quarter, the company reported a loss attributable to common stockholders of $8.55 million (or $0.32 per diluted share) versus a loss of $2.48 million (or $0.12 per diluted share) for the first quarter of 2016. The reported loss was negatively impacted by one-time expenses of a write-off of unamortized deferred financing fees ($3.88 million) and SPAC merger costs ($1.6 million).

Indicated Target

Based on comparative analysis that utilizes the valuation metric of EV/EBITDA, a second quartile industry multiple indicates a share price target of $13.50.

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