Exiting Expolanka, other side of coin

• In a down-sliding global logistics market, company offers a bonanza for minority shareholders
• US $ 210mn inflow to the stock market will boost market sentiments

Sri Lanka’s number one logistics company has decided to get back to private ownership by delisting 10 percent of its share in the Colombo stock market. Expolanka, being a global company, with operations in well over 38 countries, which promotes the Sri Lankan brand, delisting won’t change that position and the company will remain to operate out of Sri Lanka.

It is estimated that the investment by Sagawa Corporation to acquire the minority shareholders amounts to Rs.65 billion (US $ 210 million), which can be seen as a further investment into Sri Lanka. This will be the biggest infusion of cash into the market in recent history and the money will flow into various shareholders and will create liquidity and energise the stock market. 

In my view, it is very unlikely that the market will ever hit the levels that we saw during the Covid period, when the transport supply chains were in high demand; it is probably a once in a century situation that we saw a massive peak in logistics stocks around the world. Based on the circular of the company and on my own reading of the global freight market, the offer for Rs.185.00 per share is a reasonable price. 

Why do I see price as fair?

This offer is a final one-time offer. What does this mean? It means that this is the only opportunity for all the minority shareholders to exit and to get liquidity from the shares. The price offered comes at a premium to all valuations, which indicates that this is a very good price.

This offer has been made at a time where the freight industry has been lowering its returns around the world, shipping lines that performed with unbelievable profits during Covid has gone back to pre-Covid levels, where logistics companies such as Expolanka, much like many other freight forwarders globally, are undergoing severe pressure on its earnings. 

In fact, the company has recorded four straight quarters of losses. For Expolanka to trade anywhere near this price, the company must go back to Covid level supply disruption earnings. This will not occur, as those earnings can be termed once in a lifetime of earnings. 

As a global operator, Expolanka is also exposed to the exchange rate movements, where currently most of the revenue is derived in US dollars; the appreciation of the Sri Lankan rupee will further dent the earnings on shares, in my view.

EXPOLANKA WILL REMAIN A SRI LANKAN COMPANY AND WILL CONTINUE TO OPERATE IN SRI LANKA AND PROBABLY INVEST MORE IN THE LOGISTICS SECTOR, WITH THE NEW LOGISTICS PROJECTS COMING IN THE PORT OF COLOMBO AND THE GROWTH OF THE INDIAN MARKET

The year 2024 is witnessing well over 40 elections around the world, while problems are continuing in the Middle East, Ukraine and Africa. China too is slowing down growth to 5 percent and the global inflationary pressures are continuing with sluggish growth in the major European economies. 

Global GDP is expected to grow below 3 percent this year, where international organisations such as the International Monetary Fund and World Bank have been revising the growth forecast downwards over the last few months, as the energy prices too have seen an upward trend.

There is a school of thought that due to the Red Sea crisis, the freight rates will reach Covid levels, increasing profits of shipping and logistics companies. This is farfetched, as the current temporary situation on price increases on the westbound cargo, due to the Red Sea issue, is mainly built on surcharges and will come down as soon things settle down politically. 

The UNCTAD numbers show that the current indications are less than 25 percent of the freight levels that peaked during the Covid crisis and that too is direct recovery by shipping lines and not from the logistics companies. If one follows the container futures market again, it is clear that overcapacity will run up to 2026-2027, where the freight market will be a buyers’ market across major trade lanes.

In my opinion, if the company continued to trade the stock against this background, it would hit below Rs.100 in the short term, with further downward pressure with the sluggish freight markets for the foreseeable future.
I have also heard misinformation where some interpreting that delisting means that the company will move out of Sri Lanka. As far as I understand, Expolanka will remain a Sri Lankan company and will continue to operate in Sri Lanka and probably invest more in the logistics sector, with the new logistics projects coming in the Port of Colombo and the growth of the Indian market.  

(The writer, an economist by profession, with well over 30 years of experience in the shipping, international trade and logistics industry, is the founder of Shippers Academy International)