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DSKE: Daseke reports strong 1Q 2018 results; Aveda acquisition pending

05/15/2018
By Steven Ralston, CFA

NASDAQ:DSKE

SUMMARY OF RECENT EVENTS

‣ On May 8, 2018, Daseke (NASDAQ:DSKE) announced financial results for the first quarter ending March 31, 2018.
     • Total revenues increased 29.8% to $327.6 million, primarily due to the eight acquisitions completed throughout the year, increases in the fuel surcharge and an improving operating environment.
     • Adjusted EBITDA increased 91.1% to $33.512 million compared to $17.572 million in the first quarter of 2017.
On February 20, 2018, the company completed a public offering of 8,625,000 shares, which provided net proceeds of $84.569 million.
     • Management’s 2018 financial guidance remained unchanged
          • Management expects total revenues to grow (on an organic basis) to approximately $1.35 billion versus the $846.3 million reported in 2017.
          • Organic Adjusted EBITDA is anticipated to increase to approximately $150 million compared to $91.9 million in 2017.
          • Management plans to update its full year outlook to reflect the closing of the Aveda acquisition on the company’s second quarter conference call.
‣ Daseke is benefiting from initiatives aimed at improving operational effectiveness.
     • Operational organization consolidated into regional/end-market structure: Southeast, South/northeast/commercial glass, Texas/Midwest, West and High Security Cargo.
     • Consolidation of operations: two operations were combined with anticipated revenue and cost synergies of at least $2.5 million over the next 12 months.
     • Business unit turnaround through the closure of several facilities and the disposal of costly equipment resulted in a $1 million increase in EBITDA.
     • Creation of Fleet Services Department to focus on helping improve economies of scale in the areas of purchasing, equipment optimization and maintenance.
Recap of 2017
     • Total revenues increased 29.8% to $846.3 million, primarily due to the seven acquisitions completed throughout the year, increases in the fuel surcharge and an improving operating environment. Excluding the effect of the acquisitions, total revenues increased 6.2%.
     • Adjusted EBITDA increased 4.2% to $91.904 million compared to $88.240 million in 2016.
     • During 2017, Daseke entered two new markets through mergers
          • High security cargo (The R&R Trucking Companies and The Roadmaster Group) and now accounts for 10% of revenues
          • Commercial glass hauling (Moore Freight Service), which now accounts for 3% of revenues
‣ Recent Merger/Acquisition Announcement
     • Acquisition of Aveda Transportation and Energy Services is pending
          • Aveda serves the oil and gas industry with specialized transportation services, primarily rig moving and heavy haul services, with about 1,300 pieces of equipment valued at approximately CAD$114 million or US$90 million.
          • Aveda has major operations in seven major U.S. oil basins with 15 locations in Alberta, Texas, North Dakota, Pennsylvania, Ohio and Oklahoma.
          • 2017 revenues were CAD$200 million (US$158.0 million) that generated $15.9 million in Adjusted EBITDA.
          • The transaction is expected to close after a special meeting of Aveda’s shareholders on or about June 7th.

‣ The flatbed trucking industry continues to benefit from the economic expansion exemplified by rising flatbed rates. However, demand for over-dimensional loads (specialized services) has not yet improved as projects related to large capex plans industrial activity stimulates the manufacturing, construction, building, aerospace and energy industries in North America. Also, an increase in infrastructure spending to upgrade the nation’s roads and bridges should benefit Daseke.

First Quarter 2018 Financial Results

On May 8, 2018, Daseke Inc. reported results for the first quarter ending March 31, 2018. The company reported total revenues of $327.6 million, which increased 104% from $160.4 million in the first quarter of 2017. The increase was primarily due to eight acquisitions completed in 2017. Excluding the effect of the acquisitions, total revenues increased 9.5% as fuel surcharge, freight and brokerage revenues increased 33.6%, 6.4% and 10.3%, respectively, as the company benefited from a favorable rate environment and the implementation of operational improvements.

Revenue generated by the Flatbed Solutions segment increased 78.4% YOY to $145.0 million, primarily due to the acquisition of TSH & Co. Excluding the effect of the acquisition, revenue increased 9.0% (or $7.3 million), primarily due a 33.5% increase in fuel surcharges, a 6.5% increase in freight revenue and 4.3% increase in brokerage revenues.

Revenue of the Specialized Solutions segment increased 129.2% YOY to $184.9 million, which was primarily due to seven acquisitions (Moore Freight Services, Roadmaster Group, R&R Trucking, The Steelman Companies, Schilli Transportation Services, Big Freight Systems and Belmont). Excluding the effect of recent acquisitions, revenue increased 10.9% (or $8.8 million), primarily due a 35.0% increase in fuel surcharges, a 7.0% increase in freight revenue and a 15.3% increase in brokerage revenue.

Salaries, wages and employee benefits expense increased 64.3% (or $15.7 million) to 82.3 million, primarily due to acquisitions. Excluding the effect of acquisitions, salaries, wages and employee benefits expense increased 2.2%, primarily due to increased driver compensation, workers’ compensation premiums and stock-based compensation. Total fuel expense increased 73.6% to $33.4 million, primarily a result of higher fuel prices and as a result of recent acquisitions. Operations and maintenance expense increased 48.8%. Purchased freight expense increased 213% to $117.7 million, primarily due to acquisitions. Excluding the effect of acquisitions, purchased freight expense increased 16.0%.

The company reported net income attributable to common stockholders of a loss of $2.04 million (or $0.04 per diluted share) versus a loss of $8.55 million (or $0.32 per diluted share) in the first quarter of 2017. Weighted average shares outstanding increased 102% from 26,931,186 to 54,315,736 shares.

Adjusted EBITDA increased 91.1% to $33.512 million compared to $17.572 million in the first quarter of 2017.

On February 20, 2018, the company completed a public offering of 8,625,000 shares, which provided net proceeds of $84.569 million.

Management’s Guidance for 2018

Management continues to expects total revenues to grow (on an organic basis) to approximately $1.35 billion versus the $846.3 million reported in 2017. Organic Adjusted EBITDA is anticipated to increase to approximately $150 million compared to $91.9 million in 2017. Capex is budgeted to be between $85 million and $105 million. Management plans to update its full year outlook to reflect the closing of the Aveda acquisition on the company’s second quarter conference call.

Acquisition of Aveda Transportation and Energy Services

On April 16, 2018, Daseke announced has the company and Aveda Transportation and Energy Services (TSX-V:AVE) have entered into a merger agreement whereby Daseke will pay C$0.90 (US$0.71) per AVE share and will assume Aveda’s debt. Aveda shareholders will have the option to receive payment in one of three alternatives (DSKE stock, cash or a combination thereof) plus an additional cash payment of up to CAD $0.45 per AVE share at a later date (aka an earn-out based on EBITDA). The transaction is expected to close after a special meeting of Aveda’s shareholders on or about June 7, 2018.

Aveda serves the oil and gas industry with specialized transportation services, primarily rig moving and heavy haul services, with about 1,300 pieces of equipment, (approximately 430 tractors, 660 trailers and 200 light-duty trucks valued at approximately CAD$114 million or US$90 million. Aveda has major operations in seven major U.S. oil basins with 15 locations in Alberta, Texas, North Dakota, Pennsylvania, Ohio and Oklahoma. 2017 revenues were CAD$200 million (US$158.0 million) that generated $15.9 million in Adjusted EBITDA.

Initiatives to Improve Operational Effectiveness

On May 14, 2018, Daseke announced the formation of Daseke Fleet Services, a new department to help support the company’s growing scale by improving the economies of scale in the areas of purchasing, equipment optimization and maintenance. Based in Phoenix, the Fleet Services Department will focus on supporting Daseke’s operating companies through “lifecycle management of revenue equipment including maximization of national purchasing power, enhanced maintenance programs, strategic disposition of assets and high-level warranty management.” Three veteran executives (Brett Thompson, Erek Starnes and Gloria Pliler) have been tapped to support the effort.

Daseke Inc. is the major consolidator in the highly fragmented open deck trucking industry. The company has grown significantly through a series of mergers over the last 6 years. Having become a publically-traded company through a merger with a SPAC (Hennessy Capital Acquisition Corp. II) in February, Daseke is poised to benefit from the improvement in flatbed line-haul rates that began in December 2016. The recent announcements of nine mergers/acquisitions since May 2017 demonstrate that Daseke is the leading consolidator of premier open deck trucking companies.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 $14.90.

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