TransForce Sales Goal Pivots on New U.S. Acquisitions

TransForce Inc., whose stock is the top performer among Canadian industrial companies this year, is looking to the U.S. for the next round of revenue gains.

Chief Executive Officer Alain Bedard expects the provider of courier, oil-rig-hauling and waste-management services to resume acquisitions next year after about C$370 million ($365 million) in 2011 deals helped boost sales to C$2.7 billion. Now, his goal is to almost double revenue by 2017.

“If we want to be at C$5 billion, it’s going to have to be south of the border,” Bedard said in a telephone interview. “For sure over the next few years our growth will be mostly in the U.S.”

Acquisitions are part of Bedard’s push to remake Canada’s largest trucker into a continent-wide company selling transport, logistics and energy services. Montreal-based TransForce is North America’s biggest mover of oil- and gas-drilling rigs, a business with C$321 million in 2011 sales that counts Royal Dutch Shell Plc and Exxon Mobil Corp. among its clients.

“Rig hauling, fluid hauling, same-day courier are nice niches that can allow them to grow in the U.S.,” said Walter Spracklin, an RBC Capital Markets analyst in Toronto. “These are niche sectors that are not in the ultra-competitive U.S. truckload business. It’s an appropriate strategy.”

TransForce’s 36 percent gain this year before today led the 18-company Standard & Poor’s/TSX Industrials Index, which was up 1 percent. TransForce fell 1.5 percent to C$17.33 at 12:39 p.m. in Toronto, giving it a market value of C$1.66 billion.

‘Early Stages’

“The share price has done very well but there’s still lots of room to grow because Mr. Bedard has made some acquisitions that are at the early stages of profitability,” said Spracklin, who made the stock a top pick in January, up from a previous rating of outperform. “It will be a multiple-year turnaround.”

The 2011 purchases included Dallas-based package and courier company Dynamex Inc. and I.E. Miller Services Inc., which helps relocate oil rigs in five U.S. states. In April, TransForce agreed to pay about C$10 million for oil-field services assets of Peak USA Energy Services, a unit of Nabors Industries Ltd.

By value, last year’s purchases represented the bulk of C$629 million of acquisitions made since 1999, according to data compiled by Bloomberg. Of that total, C$334 million in transactions involved U.S. companies, the data show.

Segment Breakdown

Package and courier operations are TransForce’s largest unit, at 35 percent of 2011 revenue. Specialized services such as rig moving and waste management made up 24 percent, compared with 23 percent for so-called truckload freight and 18 percent for the less-than-truckload unit. Less-than-truckload carriers haul goods from more than one customer in each trailer.

TransForce “has positioned itself well to capture future growth opportunities in the energy services and package and courier markets in North America,” Damir Gunja, a TD Securities analyst in Toronto, told clients in an April 27 note.

First-quarter net income more than doubled to C$30.2 million as sales jumped 40 percent to C$788.2 million, TransForce said April 26. It also announced a 13 percent dividend increase, to 13 Canadian cents a share from 11.5 cents.

U.S. revenue now makes up 36 percent of sales, and Bedard said he expects the proportion to climb in the next five years.

Canada’s dollar, which has gained more than 50 percent against its U.S. counterpart in the past 10 years, isn’t the only lure for TransForce to buy assets in the U.S. Cheaper debt and the attraction of a larger market also matter, Bedard said.

‘Day and Night’

“The potential for growth in our package and courier business is day and night what it is in Canada,” he said. “In Canada we are a huge player whereas in the U.S., we are a small player.”

Dynamex, which had $406 million in revenue in its 2010 fiscal year, gives TransForce a foothold in same-day U.S. courier deliveries. That’s an industry whose annual sales may be as much as C$9 billion, estimates Kevin Chiang, a CIBC World Markets analyst in Toronto.

Same-day courier shipping “is a sector that is going to keep on growing,” Bedard said. “It’s highly fragmented.”

Turan Quettawala, a Scotia Capital Inc. analyst in Toronto, told clients last month that TransForce may be too dependent on gobbling up companies.

Too Many Deals?

“Organic growth remains weak in most of TransForce’s segments,” Quettawala wrote in an April 30 note. Growth “will likely depend on energy services, ongoing restructuring, which is baked into forecasts, and acquisitions, for which there is little room on the balance sheet.”

He rates the shares as sector perform, making him the only one of 10 analysts without a buy recommendation, according to data compiled by Bloomberg. TD Securities’ Gunja has an action buy list rating on the stock.

Bedard is planning cost-saving steps such as shutting about 50 terminals in the package and trucking units within three years, and putting the Canadian package and courier units on one software system. Earnings before taxes, depreciation and amortization may reach as much as C$400 million in 2012, up from C$312 million last year, he said.

Part of the increased profit will help cut debt, Bedard said. TransForce had C$881 million of loans and borrowings as of March 31, up from C$847 million three months earlier.

“If you buy TransForce you are going to have to live with a company that has debt, that is able to manage and reimburse it, and that does not dilute existing shareholders by issuing stupid equity just not to have debt,” Bedard said.

One possible asset sale is the truckload unit, which according to RBC’s Spracklin is “on the block.” He estimated a transaction might fetch as much as C$440 million.

Bedard wouldn’t comment on the likelihood of a sale, other than saying the business is “non-core to a certain degree.”

“For me right now it’s a keeper, but it’s a not a grower,” Bedard said. “This is why we will grow through acquisitions more on the parcel side in the U.S. and we will grow more on the energy side.”

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