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Daseke (DSKE) Reports 2Q Results; Reaffirms 2017 Proforma Adjusted EBITDA Guidance of $140 MM

08/10/2017
By Steven Ralston, CFA

NASDAQ:DSKE

Summary
• Daseke Inc. (NASDAQ:DSKE) reported 2Q results. The top-line was better than our expectations as open deck trucking market continues to improve. 
o Management reaffirmed guidance for proforma Adjusted EBITDA of $140 million for 2017, but now expects Adjusted EBITDA at low-end of previous guidance of the $95-to-$104 million range.

• 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. closed on May 1st.
o Merger with the Missouri-based Steelman Companies on July 1st.

• Our indicated share price target is being raised to $16.75, which is based on comparative analysis that utilizes the valuation metric of EV/EBITDA and targeting a mid-second quartile industry multiple on TTM proforma Adjusted EBITDA.

Second Quarter Results 


Yesterday, Daseke Inc. reported results for the second quarter ending June 30, 2017. The company reported total revenues of $ $197.3 million, which increased 15.8% YOY from $170.4 million in second quarter of 2016 and 23.0% sequentially. The increase was due to many factors: Freight improving 19.2%, Brokerage increasing 37.3% and the fuel surcharge (a component of total revenue and designed to compensate for fuel costs above a certain cost per gallon) increasing 16.4%. 

Revenue generated by the Flatbed Solutions segment increased 5.8% YOY to $86.9 million; revenue of the Specialized Solutions segment increased 25.1% to $112.0 million. Sequentially, revenue per truck increased 8.4% in the flatbed segment and 11.1% in the specialized segment. Management anticipates that rates in the flatbed and specialized transportation markets will continue to improve in the third and fourth quarters.  .

Adjusted EBITDA decreased 3.7% YOY to $24.3 million from $25.2 million in comparable quarter last year, but improved 38.1% sequentially. Management reconfirmed guidance for 2017 proforma Adjusted EBITDA of $140 million, which includes the retroactive effect of acquisitions completed during 2017, but now expects Adjusted EBITDA to come in at the low-end of $95-to-$104 million range.

Salaries, wages and employee benefits expense increased 15.9% to $58.2 million. Total fuel expense increased 18.4% (or $3.18 million) to $20.5 million, primarily a result of higher fuel prices and a 23.5% increase in total miles reported by the Specialized Solutions segment. Operations and maintenance expense increased 18.9% (or $4.6 million) to $29.0 million versus the comparable quarter last year in line with the Freight segment’s revenue increase of 19.2%. Interest expense increased 20.2% (or $1.1 million) to $6.5 million, primarily attributable to borrowings for acquisitions and equipment. 

For the second quarter, the company reported a loss attributable to common stockholders of $5.80 million (or $0.15 per diluted share) versus a loss of $0.23 million (or $0.01 per diluted share) for the second quarter of 2016. 

3 Mergers Announced Since Going Public on February 27th

On May 1st, Daseke merged with two open deck transportation companies: Indiana-based The Schilli Companies and Manitoba-based Big Freight Systems Inc. Schilli will expand Daseke’s presence in the Midwest while Big Freight will enlarge the company’s geographic footprint in the Canadian market. A merger with The Steelman Companies (Steelman Transportation & Group One), closed on July 1st. Steelman is a top-tier open deck and specialized transportation company located in Springfield, Missouri and operating throughout the Midwest. 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. In addition, Schilli added new capabilities of industrial logistics and significant warehousing space of approximately 800,000 square feet.

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 

Steelman Transportation specializes in flatbed and heavy haul freight while Group One focuses on transportation services for trade shows and on roll-on powersports (automobiles, motorcycles, 4-wheelers and related equipment), and also offers industrial warehousing services (approximately 128,000 square feet). Steelman Transportation was named one of the Best Fleets to Drive For® by TCA and CarriersEdge in 2012 and 2013. 

The average purchase price for The Schilli Companies, Big Freight Systems and The Steelman Companies was 5.4 times 2016 Adjusted EBITDA and resulted in the issuance of 1,088,305 shares of DSKE. Since 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), one can assume the merger with Steelman consisted of the issuance of 746,172 of DSKE shares, along with an undisclosed amount of assumed debt and an amount of cash on hand. After the mergers, Daseke owns over 3,500 tractors and 7,300 trailers, along with approximately 1.2 million square feet of industrial logistics, warehousing and distribution operations.

Combined, Schilli, Big Freight and The Steelman Companies generated approximately $165 million in revenues and $20 million of Adjusted EBITDA during 2016. The three companies align well with Daseke’s configuration of asset-light scalable capacity with an estimated 52% of revenues being asset-light or logistics-related. 

Daseke’s proforma 2016 revenue including the three newly merged companies is estimated to be $818 million (25.5% above reported results) while proforma Adjusted EBITDA increased to $108 million (21.9% above the actual 2016 calculation).

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.

Indicated Target

Based on comparative analysis that utilizes the valuation metric of EV/EBITDA, a mid-second quartile industry multiple indicates a share price target of $16.75.

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