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Daseke (DSKE) Reports 3Q Results; Reaffirms 2017 Proforma Adjusted EBITDA Guidance of $140 MM

By Steven Ralston, CFA



• Daseke Inc. (NASDAQ:DSKE) reported financial results for the third quarter of 2017. 
• Management Guidance
• 2017 pro-forma Adjusted EBITDA of $140 million was reaffirmed
• 2017 Adjusted EBITDA was lowered to around $90 million, below the original range of guidance of $95-to-$104 million, due to the one-time impact of $5.7 million ($3.3 million from Hurricanes Harvey & Irma and $3.3 million from lower tractor utilization caused by open driver positions)
• During the quarter, the company added two flatbed and specialty trailer companies: 
• The Steelman Companies on July 1
• R&R Trucking, Inc. on September 1 (adding High Security Cargo capability)
• Six mergers during 2017 have slightly altered the company’s business mix:  

• The Specialty Solutions segment revenue has increased from 52.7% to 57.3% of total revenues. In addition, asset-based revenue has increased from 36% to 38% of revenues. 
• In September, the company raised $68.1 million through an upsized equity offering of 5,675,967 shares. The offering was oversubscribed by 5 times. Net proceeds were approximately $63.6 million.
• 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, the proposed increase in infrastructure spending to upgrade the nation’s roads and bridges should benefit Daseke.

• Excluding fuel surcharge, Daseke’s flatbed rate per mile increased 8.8% YOY from $1.70 to $1.85 and increased 2.7% sequentially from $1.80. 

• Excluding fuel surcharge, Daseke’s Specialized Solutions rate per mile decreased 9.5% YOY from $2.98 to $2.70 but increased 3.1% sequentially from $2.62.
• Daseke Inc. continues to be the major consolidator in the highly fragmented open deck trucking space. Management plans to increase the company’s senior debt facility to augment the funds available for additional acquisitions ($133 million cash on hand and $70 million in a revolving line of credit).
• Our indicated share price target is being raised to $17.25, which is based on comparative analysis that utilizes the valuation metric of EV/EBITDA and targeting an average industry multiple on TTM proforma Adjusted EBITDA.

Third Quarter Results 

On November 9, 2017, Daseke Inc. reported results for the third quarter ending September 30, 2017. The company reported total revenues of $ $231.3 million, which increased 32.8% YOY from $174.1 million in third quarter of 2016 and 17.2% sequentially. The increase was primarily due to recent acquisitions. Excluding the effect of recent acquisitions, the increase was 5.1% as freight and brokerage revenues improved. The fuel surcharge (a component of total revenue and designed to compensate for fuel costs above a certain cost per gallon) increased 41.2%, which includes the effect of recent acquisitions. 

Revenue generated by the Flatbed Solutions segment increased 8.4% YOY to $85.6 million primarily due to rate increases despite 1.1 million fewer miles being driven versus the comparable period in 2016. A 15.3% (or $1.1 million) increase in fuel surcharge revenue also contributed to the segment’s revenue growth. Revenue per truck increased 4.7%.

Revenue of the Specialized Solutions segment increased 52.9% to $147.6 million, which was primarily due to recent acquisitions. Excluding the effect of recent acquisitions, revenue increased 2.9% (or $2.8 million), primarily due a 3.7% increase in freight revenue and a 19.6% increase in fuel surcharges. Excluding the effect of recent acquisitions, Brokerage revenue decreased 5.5%. Revenue per truck decreased 4.5% in the specialized segment. The Specialized Solutions segment has not yet improved, and management does not have great deal of confidence that the lackluster performance will improve significantly in the fourth quarter since continued softness is still being experienced in the over-dimensional load business.

Adjusted EBITDA increased 8.0% YOY to $26.977 million from $24.980 million in comparable quarter last year, and improved 11.2% 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 below the originally anticipated $95-to-$104 million range at roughly $90 million due to the impact of an estimated $5.7 million (a one-time $3.3 million from Hurricanes Harvey & Irma and $3.3 million from lower tractor utilization caused by open driver positions).  From Texas to South Carolina, Daseke experienced significant short-term disruption. Overall load counts declined 15%-to-20% during the first 2 weeks after the hurricanes. In certain specific regions, load counts were down 30%-to-45%. 

The driver is being addressed with an initial 5% driver wage increase and stock incentives. The driver stock program was instituted during the last month of the second quarter.

Salaries, wages and employee benefits expense increased 31.8% (or $15.7 million) to $65.0 million. Total fuel expense increased 43.0% (or $7.4 million) to $24.7 million, primarily a result of higher fuel prices and a 60.5% increase in total miles reported by the Specialized Solutions segment. Operations and maintenance expense increased 26.0% (or $7.3 million) to $35.1 million versus the comparable quarter last year in line with the Freight segment’s revenue increase of 26.5%. Interest expense increased 28.3% (or $1.9 million) to $8.6 million, primarily attributable to borrowings for acquisitions and equipment. 

For the third quarter, net income was $50,000 versus a net loss of $1.3 million for the third quarter of 2016. The company reported a loss attributable to common stockholders of $1.18 million (or $0.03 per diluted share) versus a loss of $2.50 million (or $0.12 per diluted share) in the comparable quarter last year. 

As a result of the mergers, long-term debt has increased from $278.5 million at the end of 2016 to $395.8 million at the end of the third quarter. In addition, share outstanding has increased 17.9% from 37,715,960 to 44,480,232 shares.

Common Stock Offering

On September 20, 2017, Daseke completed an upsized public offering of 5,675,967 common shares, along with 409,833 common shares by certain stockholders. The offering was oversubscribed by 5 times. The company raised $68.1 million, and net proceeds were approximately $63.6 million, which will be used for general corporate purposes, such as working capital needs, capital expenditures, debt repayment or financing future acquisitions. Stifel, Nicolaus & Company and Cowen and Company acted as joint underwriting managers.

Indicated Target

Based on comparative analysis that utilizes the valuation metric of EV/EBITDA, an average industry multiple indicates a share price target of $17.25.


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