MoneyTalks: Silk Logistics to rise on stable revenue; Shine Justice at ‘inflection point’

MA Moelis has initiated coverage on two ASX stocks
Silk Logistics is slapped a Buy rating on its stable revenue base
Shine Justice also gets a Buy rating on ‘inflection point’

Silk Logistics’ recurring revenue could mitigate downturn

Broker MA Moelis has initiated coverage on logistics business, Silk Logistics (ASX:SLH), with a Buy rating and a 12-month price target of $2.75 (versus current price of $1.75).

Silk is a port-to-door, land-side logistics services business, with locations in most major cities in Australia. The company owns 29 warehouse sites and 20 port logistics hubs across its national coverage.

The company operates three divisions.

The Port Logistics division specialises in transporting shipping containers between Australia’s major ports and both Silk-operated and client facilities. The division moved more than 420k 20ft equivalent units in FY23.

The Warehousing segment provides specialist warehousing solutions to customers, based on individual requirements. Services include basic warehousing, inventory management and picking services. In FY23, the warehouses were 89% occupied, up from 85% in FY22.

Meanwhile, the Distribution division helps customers optimise their supply chains by providing a platform that consolidates schedules from a range of third-party logistics providers. This is SLH’s newest offering.

MA Moelis believes SLH is well positioned for continued growth based on its tier 1 designation in port logistics, supported by the company’s recent acquisition of Secon, which will bolster its Victorian presence and wharf-side bulks volume.

Beyond the port business, SLH’s warehousing and distribution capability has more room for growth with an additional 85,000 sqm capacity growth and matching demand. Around 75% of its warehouse revenue is from contracted customers, with which SLH has long term relationships.

In addition to physical logistics services, SLH offers cutting edge data analytics services to their clients. The platform can provide predictive insights to clients, as well as control tower visibility of both wharf to warehousing and last mile distribution.

Meanwhile, SLH’s customer base is mostly blue chip companies, which offer stable recurring revenue that mitigates against cyclical industry effects.

The company also has the balance sheet firepower to support its stated medium term $1-billion revenue ambition, with a modest debt leverage of only 0.6x net debt to EBITDA.

“As the third largest port logistics provider, SLH is in a strong position to capitalise on their national, tech enabled, fully integrated service offering,” said the note from MA Moelis.

“SLH has a strong medium to long term outlook, underpinned by forecast increases in import and export volumes, plus low warehousing supply supporting elevated rates and utilisation.

“Inorganic growth opportunities are also expected to present in the short term, as smaller operators navigate challenges in the operating environment,” noted the broker.

Shine Justice is ‘at an inflection point’

MA Moelis has also initiated coverage on law firm, Shine Justice (ASX:SHJ), with a Buy rating and a 12-month target price of $0.90 (versus current share price of $0.70).

Shine is the number one player in personal injury (PI) law in Australia, complemented by several new practice areas (NPA) including class actions, family law and commercial disputes.

The firm was founded in 1976, and listed in 2013 at an IPO price of $1.00/share, and now has a national presence and operates seven established brands.

The broker believes Shine’s quality of earnings has put the company at an inflection point right now.

The demand for PI and NPA legal services has been climbing steadily over the preceding decade, underpinned by a growing population, and the broad adoption of third-party litigation funding improving case risk profiles for lawyers.

As such, the number of class actions filed in Australia has been on a steady growth trajectory, growing at a 13.5% CAGR from 2011-2021.

The personal injury segment has been driven by volumes of road accidents and workplace injuries, both of which have declined over time, concedes the broker. The impact to SHJ has however been partially offset by increases in the value of claims.

“SHJ is exiting an ‘invest for growth’ phase, and shifting focus to driving cash conversation,” said the note from MA Moelis.

“As the number one player in PI law, we believe SHJ is well positioned to deliver earnings growth as the company increases the proportion of fee earners in their 1,094 strong workforce, and progress their 40 active class actions.”

MA Moelis adds that the domestic personal and workplace injury legal services market, at $1.9 billion, has limited exposure to the broader economy and has delivered consistent growth, broadly in line with inflation for the last decade.

“We believe these defensive characteristics to be favourable in the present macroeconomic environment.”

Internally, MA Moelis says SHJ has a rigorous case selection process, with primary considerations including probability of success, size of potential damages and estimated case duration.

“SHJ has a strong track record of case selection, evidenced by their 80% success rate,” said MA Moelis.

“Management’s recent growth investments coupled with an extensive class action pipeline and growing cabinet, leaves SHJ well positioned to execute on refined focus on margin expansion and cash generation.”