Join our community of smart investors

FTSE 350: Transporters struggle to keep the pace

Industrial transporters are in a race to remain relevant in a constantly evolving marketplace
January 29, 2016

Aside from transporting goods to customers, there's not much that links the three FTSE 350 companies that make up the industrial transportation sector. Even the falling oil price, which most assumed would be a clear positive for shipping, aviation and postal companies, has yielded mixed results for the constituents.

While fuel prices represent a significant cost for transportation companies, the plummeting value of Brent crude has affected the spending power of many customers. This certainly has a direct bearing on revenue for BBA (BBA), the aviation services business mainly focused on jetting rich US executives around the globe. A shift in corporate conscience - or, at least, a spot of corporate belt-tightening - means that executive travel has come under increased scrutiny since the recession, particularly any travel arrangements that smack of indulgence. The fall-away in executive remits, coupled with a big, unpopular acquisition that forced BBA to launch a five-for-six rights issue and move further into debt, means sentiment towards the stock is understandably at rock bottom.

Elsewhere, integrated shipping services supplier Clarkson (CKN) has had more to shout about. While the depressed oil price - and a consequent reduction in industry capital budgets - hasn't been kind to the group's offshore operations, its tanker business has emerged as a beneficiary of cheap energy. This is because growing supply means an increasing amount of the black stuff is getting transported via sea lanes.

Management has also been defiant, despite perceptions over the current unhealthy state of shipping markets. Global economic uncertainty spurred many of the world's biggest companies in the sector to warn investors of trouble ahead. But according to bosses at Clarkson, this environment has driven a flight to quality, meaning the group's full-service client offering - consisting of shipping, banking and broking services - is now in even more demand.

Royal Mail (RMG), too, is a leader in its field, although the former national monopoly has had a harder time building, or perhaps restoring, market share. Pressures to compete in a rapidly changing postal landscape forced the recently listed group to outline costly transformation plans. Cost savings will be generated from another batch of voluntary redundancies, with some of these funds used to add support services such as same-day delivery, or systems to facilitate the return of unwanted products to e-retailers. But while such efforts to modernise the business are positive, it won't be easy to conquer a market essentially in flux - and one heaving with competitors. News that online retail behemoth Amazon is launching its own UK delivery network adds to these concerns.

 Price (p) Market cap (£m)PE (x)DY (%)1-year change (%)Last IC view:
BBA AVIATION          158                    1,627 11.26.6-38.1Sell, 191p, 20 Oct 2015
CLARKSON       2,180                       659 17.32.816.3Hold, 2,625p, 18 Aug 2015
ROYAL MAIL          437                    4,366 11.15.41.5Hold, 473p, 20 Nov 2015
 

Favourites

Clarkson appears to be the only one of our FTSE 350 constituents to emerge victorious from tricky trading conditions. But that success is factored into the shipping service group's lofty share price. That leaves Royal Mail; with limited revenue growth expected in the near term, the emphasis is on cost control to improve earnings and reverse the group's fortunes. Value investors could argue that this heavy task is balanced out by the shares' 4.8 per cent yield and forward earnings rating of 12, which represents a sizeable discount to peers such as the struggling UK Mail (UKM).

Outsiders

BBA's shares may have already tumbled a third in the past year. But with little sign of a turnaround and a debt-swamped balance sheet offering little headroom, we anticipate further falls in 2016.