ANZ predicts transport businesses to decrease by nearly 10,000, but profits will rise
- ANZ outlook predicts 40,000 transport businesses will consolidate into 33,000
- Return on investment for transport only businesses is higher than those who have integrated things like warehousing
- Revenue was down for all business models last year, while demand was up.
- Specialised transport achieved better return on investment than general
- Future predictions see transport revenue increasing despite mining downturn
ANZ analyst Tim Suffield says the transport industry will contract from more than 40,000 businesses to around 33,000.
He described the industry as “dynamic” but said it was operating on very fine margins and change was on the horizon, however ANZ has invested heavily in the industry to the tune of a billion dollars of capital.
“The road ahead, pardon the pun strategy is critically important in any industry. It is all the more important in an industry that is operating with relatively fine margins,” he said.
“One of the negative things that we are forecasting is that the number of businesses will continue to shrink.
“That is not just a forecast of ANZ that have put out there in the market, this is a forecast that a number of the economic forecasters have.
While Mr Suffield said he didn’t have all the answers he posed some interesting questions that all operators need to think about including why is the industry making less money even though demand is growing?
“I don’t like to leverage a question, but this is something that I think is relevant to the industry because we are working very hard, but are we making as much money in return as we deserve?
“Some of the things that are potentially at play are fuel surcharges, and intense competition from a large number of single truck operators.
“That is something that is definitely driving and impacting top line growth, and also impacting margins.
“In addition, the future is coming. A lot of people would have heard about tech disruption... Technology is definitely impacting all segments of the industry.
“Being on top of those changes and having the ability to capitalise on them will be the difference between who is here in 10-15 years and who is not.
“Utilisation does not necessarily power profits...The old adage that rubber on the road equals money is not necessarily true.”
Mr Suffield said the forecast is the industry needs to find $3.5million in cash over the next five years.
He said the economy was “steady as she goes”, it’s “chugging along quite well” despite the bad press.
“From an Australian perspective, I think we are actually lucky to be here operating in a country that is relatively steady, and this is on the back of the slow-down in mining.
“If you look at the road transport or trucking industry as some of the key drivers that are going to increase revenue in the years ahead, trade is critically important. When I say trade, I mean both imports and exports.”
ANZ forecasts the slow down in mining will pick up and that imports will stay relatively steady.
“We’re going to see foreign currency move up and down a lot, but I don’t think that is necessarily going to directly impact the industry going forward.
“Finally just to close out on the whole thing, next year you have got France and Germany both going to elections and you have seen the UK exercise its ability to leave the EU.
“Germany and France are subsidising a lot of the broader European market. That is just something to keep in mind which potentially could have an impact.”
Mr Suffield said the transport industry made up about five percent of the Australian economy which was equal to about $80 billion.
“So there is 80 billion dollars of revenue being generated across road and transport, which is large. And it’s sustainable, and it’s growing at a larger rate than system or GDP growth.
“If we were to think about what does that mean for the trucking industry? Trucking actually represents half of that, which we can see on the middle chart.
“That is approximately 52% or $40 billion in revenue which is attributable to trucking and road transport businesses.”
Mr Suffield said he thought the trucking game was not a simple business.
“The industry is characterised by a huge amount of players, there is fierce competition, we know that there are a lot of pros as well, and that is something that I would like to touch on with you now.
“We know that the industry is growing by around three percent fantastic, but there is work to be done.”
He said air, rail and sea were never going to take over trucking.
Technology, however was a plus when it came to the industry.
“What I mean by this is drones and potentially driverless cars.
That sounds like something out of Star Wars at the moment but driverless cars are available, or they do have the technology to drive driverless vehicles across Europe at the moment.
“Driverless trucks have the potential to completely disrupt the industry in terms of efficiencies and also in terms of cost. I’m not suggesting that this is going to happen any time soon but what I’m suggesting is keep on top of trends, keep on top of what is happening in Europe and what is happening in the US.”
When it came to costs Mr Suffield said there were a lot of additional costs to running a business that were not around 10-15 years ago.
He said consolidation of the industry would continue and Revenue will increase from about $40million to more than $85 million in the next 20 years.
“And then we turn around and say, there are currently 41,000 operators – that is not going to be the case. You’re going to have closer to 33,000, and that is over 20 years.
“But forecasters, and it’s not just ANZ, suggest that there could be up to 500 businesses per annum over the next 20 years that will no longer exist.
“So we are talking about 500 businesses each year that will drop off, and a lot of them are single operators, we understand that. But from a consolidation perspective, there are limited opportunities for the large operators to take these contracts, take this business and make that profit into their business.”
When it came to efficiency he said you’re not going to see the efficiency gained from the introduction of the B-triple any time soon.
“We are more or less limited on volume, we are limited on pay load, and we are also limited on restrictions and where these can go so this is all about efficiencies and moving a step forward.”
He’s analysed trucking businesses, private and public and found that industry revenue growth has declined in the last year.
“For me, it’s a little bit strange looking at it from an outside point of view because we know that demand is growing, and that the amount of goods being distributed is growing, so for the revenue to come off across all quartiles was a little bit surprising to me. That is a question that I would like you guys to think about because I don’t see that happening going forward.”
Looking at earnings before interest and tax margins the top performers in the industry sat at 4.2% compared with global retail sitting at 2.8% its not too bad.
Global construction sits at about 8.9%, the scary thing is some of the lower performing transport businesses has dipped into negative earnings before interest and tax.
“That is not sustainable. This is another reason why there will be more consolidation in the industry. This is going to present opportunities for a lot of companies in the industry to make that position and continue to grow there.”
Mr Suffield also said the data showed that it didn’t matter what your business model was, transport only, transport and warehousing or specialised transport the average earnings are the same.
He also said asset utilisation didn’t necessarily drive returns. So general goods carriers who use their equipment to the maximum didn’t make more money than specialised transport.
“The general rules for return on capital on general goods has been consistently lower than for specialised goods.
“Specialised goods are actually achieving a premium when it comes to returns on investment based on the median result. In addition, transport only has performed significantly better than the integrated business. As you can see here, the transport only line for return on capital is significantly higher than what the integrated businesses are achieving.”
The industry average for return on investment is 5.5% and the time it takes to receive payment from customers has reduced on average.
“The second thing to note that I was surprised about was that general transport companies pay their workers quicker. So when they pay their bills, they pay their bills quicker than what specialised operators do.”
When it came to predicted growth and the amount of money that needs to be invested to make that growth happen, Mr Suffield says about $3.5million will be needed in capital in the next five years.
“That is a large amount of money. I know financiers, I know banks will support that to a certain extent, let’s just call that 45% for argument’s sake, that is in line with history. “That means that equity within this business or within this industry is going to have to grow by $1.1million dollars over the next five years.
“If I was to run the numbers on the average amount of equity that what would be required by each business, and I’m assuming that businesses shrink, that is going to be somewhere in the vicinity of $50,000 in equity that needs to be paying into the business to meet this forecast demand. So this is all coming down to looking forward, forecasting, this is all about strategy, this is about where you play in those different business models, it is about knowing where you sit, knowing how you perform, but you know that there is impending funding up on the horizon and this is something that the industry is going to have to collectively meet.
“There is definitely money to be made. We are going to see businesses that are going to get bigger, we are going to see opportunities across mid-sized businesses and unfortunately we are going to see some consolidation. So some of the single operators probably have to go work for a boss again.
“The road transport industry is critically important to the Australian economy.
“It is not going away. It is moving forward and it is going to be larger. The landscape will change.
“We are going to have less businesses and we are going to have some form of technology disruption that will create some upheaval in the industry over the medium to long term.
“Know what you’re doing, know where you’re playing and know what it is that you should be hitting. Finally, there is a large investment on the horizon that will require a group effort.”