Aegis Logistics Ltd (AEGISCHEM) is focused in supply management of oil and gas logistics. Liquid Terminal Division provides storage and terminal facility for oil and chemical products. Gas Terminal Division provides imports, storage, and distribution of petroleum products like LPG and propane. It services are related to sourcing of product, storage and port operations, arranging road and pipeline movement, shipping, and integrated supply chain management. This is small caps which has potential for long term buy and hold because it operates in infrastructure sector and has good financial management.

Trend Analysis

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is from 2000 to 2009.

• Revenue: Increasing trend since 2003 with average growth of 30% (SDev. 31%). Neutral Observation.
• Earnings per share: Historically increasing trend, but flat for last few years. Average growth of 34% (SDev. 46%). High variability and has possibility of negative growth. Neutral observation.
• Net cash flow from operations: Overall an increasing trend. Good observation.
• Profit/Loss from operations: Overall increasing trends in profits from its operations since 2000. However, negative in 2009. Neutral observation.
• Reported net profit: Overall an increasing trend since 2000. Good observation.
• Gross margins: Current GM of 10.3% is lower than historical average of 19.4% (stdev. 5.7%). Reducing and hence not a good observation.
• Operating margins: Current OM of 12.8% is lower than historical average of 21.3% (stdev. 6.4%). Reducing and hence not a good observation.

Aegis Logistis: Trend Analysis

Quality of Dividends

In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing of profits with common shareholders.

• Dividend per share: Chart 3 shows that recent growth in dividend payments since 2005. Prior to that it had an anemic growth. Neutral observation.
• Payout factor: This has been less than 40%. Good observation.
• Dividend growth rate: The dividends have not grown at sustained year-on-year basis. i.e. there has been a high level of variability. Overall, on the basis of last nine years, the dividends have grown at an average of 49% (std dev. 99%) which is more than overall EPS growth rate of 34% (std. dev 46%). Not a good observation.
• Ratio of cash from operations to reported net profit: Generally more than 1.0. Good observation.
• Ratio of profits from operations to reported net profit: This ratio is more than one. Good observation.  
• Ratio of Cash from operations to total debt: This ratio was trending upwards, towards more than one. Good observation.

Dividend Cash Flow vs. Risk Free Savings Cash Flow

Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 1.3% at current price of Rs. 188; and (2) savings interest rate is 7%.

• Best case scenario: considering average dividend growth rate of 49% for last nine years, the dividend cash flow will be 3.7 times the cash flow from savings interest at the end of 10 years.
• Worst case scenario: considering low end of the expected dividend growth of 10%, the dividend cash follow will be only 0.27 times the cash flow from savings interest at the end of 10 years.
• In order to have equal cash flow (i.e. dividends = savings interest) in 10 years time period, the current yield should be 5.6% with average dividend growth of at least 10.0%. At this yield the buy price is Rs 125.

Projected Beta-based Expected Return

I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.

• The stocks three year Beta value is 0.76. This means this stock is volatile w.r.t. S&P CNX NIFTY index.
• The expected return is 13.4% relative to market index.
• Now factoring in 13.4% of expected return into the worst case dividend growth of 10% and current yield of 1.3%, the total cash flow is 3.5 times the savings interest rate.

Fair Value Calculation

The next step is to estimate the fair value so that we can understand return characteristics for this investment.

• NPV price based on 15 year DCF: Rs 131.0
• Average high yield price calculated based on past 9 years: Rs 146.8
• Pricing relative to 9 year average PE ratio: Rs 158.5
• Pricing based on PE ratio of 12: Rs 209.4
• Graham number: Rs 202.0

The range of fair value is calculated as Rs 152 to Rs 170.

Qualitative Analysis

• AEGISCHEM is, probably, the only standalone oil and gas logistics company that is traded on equity markets. This can be viewed as an opportunity or as a mine field. I believe it is an opportunity because focus brings in expertise and market growth.
• The key aspect that I like is that it has identified gas (and LPG) as its growth driver. This includes terminals and retailer. With the continued growth of Indian economy, the demand of gas (particularly LPG) will continue to increase. Gas tends to be cheaper and environmentally favorable in long run.
• It has a very good balance sheet where growth and capital expenditure is very efficiently managed by cash flow and controlled debt.
• I like company’s execution.
• The area of concern for me is the downward trend in its margins. These margins have dropped down to low-teens from low-twenties. This is one area that long term investors will have to keep an eye on.
• At this point in time, I would not be overtly concerned about low margins, because it has had consistently increasing operating cash flow and low debt.

Summary…

I would expect Aegis Logistics to provide a slow dividend growth and potential capital appreciation over long term. I do not consider it as an exceptional good dividend paying company. I expect it to be volatile stock in my long term portfolio. The rationale for investing in Aegis Logistics should be to hedge against the growth of oil and gas logistics market segment.

Disclosure: Long on Aegis Logistics Limited.

Disclaimer: This analysis is in the context of my long term buy and hold investment philosophy. It is in line with my investment objectives and my personal risk profile. Please do your own research for your own objective before making an investment decisions for Aegis Logistics Limited.

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