Daseke (DSKE) Achieves & Exceeds Pro Forma EBITDA Guidance of $140 million for 2017

By Steven Ralston, CFA

NASDAQ:DSKE

EXECUTIVE SUMMARY OF RECENT EVENTS

➢ On December 4, 2017, Daseke Inc. (DSKE) announced that three additional carriers have merged into Daseke.
• TSH & Co. (Tennessee Steel Haulers & Co.)
• 100% asset-light operations with approximately 1,100 owner operators
o Shifts Daseke’s business mix to 50/50 (asset-light/asset-based)
• Enhances size & scale of flatbed coverage in the East Coast and Southeast U.S.
• The Roadmaster Group
• Augments high-security cargo exposure
• Moore Freight Service, Inc.
• Adds specialized flatbed service of hauling sheets of commercial glass
➢ With the closing of the latest mergers, 2017 pro forma Adjusted EBITDA is anticipated to be $143 million, which exceeds management’s guidance of $140 million. Also, Daseke is on track to report 2017 pro forma revenue of $1.2 billion.
• Guidance for 2018 pro forma Adjusted EBITDA is $170 million.
➢ Daseke entered two new markets though three of the mergers that closed in 2017.
• High security cargo (The R&R Trucking Companies and The Roadmaster Group)
• Commercial glass hauling (Moore Freight Service)
➢ The company has been very successful in raising capital to help fund its growth initiatives, including the company’s consolidation strategy.
• In September, the company raised $68.1 million through an upsized equity offering of 5,675,967 shares. The offering was oversubscribed by 5 times. Net proceeds were approximately $63.6 million.
• On December 1, 2017, Daseke, Inc. announced a Second Amendment to the Term Loan Agreement with Credit Suisse AG, which provided for a $150 million tack-on to the existing Term Loan Facility, which helped in closing the acquisitions listed above.
➢ The flatbed trucking industry continues to benefit from the economic expansion exemplified by rising flatbed rates. However, demand for over-dimensional loads (specialized services) has not yet improved as projects related to large capex plans industrial activity stimulates the manufacturing, construction, building, aerospace and energy industries in North America. Also, the proposed increase in infrastructure spending to upgrade the nation’s roads and bridges should benefit Daseke.
➢ The company continues to build awareness by attending Analyst Conferences:
• Liolios 6th Annual Gateway Conference (September 6, 2017)
• UBS Industrials and Transportation Conference (November 15, 2017)
• 2017 Southwest IDEAS Investor Conference (November 15, 2017)
• 8th Annual Craig-Hallum Alpha Select Conference (November 16, 2017)
• Furey Research Partners Hidden Gems Conference (November 16, 2017)
• Credit Suisse 5th Annual Industrial Conference (November 30, 2017)
➢ On December 5, 2017, the Horatio Alger Association of Distinguished Americans announced that that Don R. Daseke, founder, CEO and Chairman of Daseke, Inc. had been selected for membership, along with 11 other esteemed leaders across North America. The formal induction will occur in early April during the 71st Horatio Alger Award Ceremonies in Washington DC.

Daseke Inc. is the major consolidator in the highly fragmented open deck trucking industry. The company has grown significantly through a series of mergers over the last 6 years. Having become a publically-traded company through a merger with a SPAC (Hennessy Capital Acquisition Corp. II) in February, Daseke is poised to benefit from the improvement in flatbed line-haul rates that began in December 2016. The recent announcements of seven mergers/acquisitions since May 2017 demonstrate that Daseke is the leading consolidator of premier open deck trucking companies.

MERGERS OF 2017

On May 1, 2017, Daseke merged with two open deck transportation companies: Indiana-based The Schilli Companies and Manitoba-based Big Freight Systems Inc. Combined, Schilli and Big Freight generated approximately $119 million in revenues and $13 million of Adjusted EBITDA during 2016. Schilli will expand Daseke’s presence in the Midwest while Big Freight will enlarge the company’s geographic footprint in the Canadian market. Schilli and Big Freight align well with Daseke’s configuration of asset-light scalable capacity. A merger with The Steelman Companies (Steelman Transportation & Group One) closed on July 1st. Steelman is a top-tier open deck and specialized transportation company located in Springfield, Missouri and operating throughout the Midwest. Management continues to pursue a strategy of being the highly fragmented open deck trucking space.

The Schilli Companies offers open deck specialized transportation services, along with industrial warehousing and distribution solutions. Comprised of four operating companies (Schilli Transportation Services, Schilli Specialized, Schilli Distribution Services and Schilli National Lease), Schilli also provides export packaging and free trade zone access in Savannah, Georgia. In addition, Schilli added new capabilities of industrial logistics and significant warehousing space of approximately 800,000 square feet.

Big Freight Systems serves all Canadian provinces and 19 states of the U.S. Founded in 1948, Big Freight is an award-winning, top-tier safety-ranked open deck carrier that provides a more robust local presence in Canada. Several notable awards or recognition received by Big Freight include:
• 1997 Top 50 Best Managed Private Companies in Canada
• 2012, 2013 and 2014 Canadian Shipper's Choice Award
• 2014 Carrier Choice Award
• 2016 National Fleet Safety Award by Truckload Carriers Association in the Small Carrier Division

The combined consideration for the mergers with Schilli and Big Freight Systems was $36.8 million, which consisted of $33.4 million in cash and 342,133 shares of DSKE (valued at $3.44 million). Daseke also assumed approximately $32.5 million of outstanding debt, which prices the transactions at 5.5 EBITDA. After the mergers, Daseke owns over 3,500 tractors and 7,300 trailers, along with 1.1 million square feet of industrial logistics, warehousing and distribution operations.

On July 1, 2017, Daseke merged with The Steelman Companies (Steelman Transportation & Group One), a top-tier open deck and specialized transportation company located in Springfield, Missouri and operating throughout the Midwest. During 2016, The Steelman Companies generated revenues of approximately $46 million and Adjusted EBITDA of about $7 million. Steelman Transportation specializes in flatbed and heavy haul freight while Group One focuses on transportation services for trade shows and powersports (automobiles, motorcycles, 4-wheelers and related equipment), and also offers industrial warehousing services (approximately 128,000 square feet).

On September 1, 2017, Daseke closed its 4th merger of 2017 with The R&R Trucking Companies becoming part of the Daseke family of open-deck and specialized trucking companies. As a U.S. government approved carrier of arms, ammunition and explosives (AA&E), R&R adds new capabilities and further diversification to Daseke’s cargo mix. In 2016, R&R Trucking generated revenues of approximately $52 million and $6.5 million of Adjusted EBITDA.

R & R Trucking is a premier, specialized truckload carrier of sensitive cargo. The trucking company strives to be the safest, most dependable transporter of security sensitive cargo, especially since it provides freight services to the Department of Defense, the Department of Energy, the radioactive materials market and commercial explosives customers in North America. R & R Trucking transports hazardous materials such as flammable and nonflammable gases, flammable liquids and solids, spontaneous combustibles, oxidizers, corrosives, explosives, infectious substances, poisons and radioactive materials. R & R also offers asset-based logistic and brokerage services; container and LTL services through a fleet of dry vans, reefers, flatbeds and specialized trailers.

Combined, Schilli, Big Freight, The Steelman Companies and The R&R Companies generated approximately $218 million in revenues and $26 million of Adjusted EBITDA during 2016. Daseke’s pro forma 2016 revenue including these four merged companies is estimated to be $870 million (33.3% above reported results) while pro forma Adjusted EBITDA increased to $114 million (30.3% above actual 2016 results).

The average purchase price for The Schilli Companies, Big Freight Systems, The Steelman Companies and The R&R Companies was 5.4 times 2016 Adjusted EBITDA. After these four mergers, Daseke operated over 3,800 tractors and 8,200 trailers, along with approximately 1.2 million square feet of industrial logistics, warehousing and distribution operations. The R&R Companies added approximately 300 tractors and 900 trailers.

On December 1, 2017, TSH & Co., The Roadmaster Group and Moore Freight Service merged into the Daseke family of companies. TSH & Co., a 100% asset-light operating company, is expected to shift Daseke’s business mix to 50/50 asset-light/asset-based while the addition of The Roadmaster Group bolsters Daseke’s exposure to attractive niche market of high-security cargo carriers. On the other hand, Moore Freight Service expands Daseke into the specialized commercial glass hauling market.

Founded in 1977 and based in Nashville, Tennessee Steel Haulers & Co. (TSH & Co.) is a 100% asset-light operating with approximately 1,100 owner-operators serving the East Coast and Southeast, along with a strong presence in Mexico. TSH & Co. offers a tractor and trailer lease-to-own program to support its independent contractors. Asset-light owner-operator operations require minimal capex and have lower fixed costs. In addition, driver turnover tends to be lower. The addition of TSH & Co. is the main driver helping shift Daseke’s business mix to a well-balanced 50/50 (asset-light/asset-based) ratio.

Headquartered in Phoenix, The Roadmaster Group, is a collection of specialized trucking companies providing secured land transport, heavy haul and freight logistics services. Though founded in 2011, in May 2016, Roadmaster purchased Tri-State Motor Transit Co., a significant high security cargo carrier which was founded in the 1930’s. With a national footprint, Tri-State provides secured shipment of hazardous and/or sensitive material, including AA&E (Arms, Ammunitions and Explosives), explosive waste, hazardous waste, low-level radioactive waste and sensitive cargo.

The high security cargo market has high barriers to entry with drivers requiring security clearance and terminals needing to be approved. Synergies with R&R will help provide seamless service in this attractive niche which exhibits relatively stable demand with lower levels of seasonality.

With The Roadmaster Group having merged into Daseke, along with R&R, the high security cargo end market increased to 11% of Daseke’s revenue business mix.

Roadmaster’s Heavy Haul division provides specialized trucking services for high, wide and heavy freight for a variety of end markets, but with particular specialization on the transport of pipeline and construction equipment.

Founded in 2001 and based near Knoxville, Moore Freight Service is in the top three of commercial sheet glass transporters in the U.S. Utilizing over 300 specialized trailers, Moore Freight specializes in delivering flat glass (sheets as large as 17’ by 10’ and more than one inch thick) throughout the Midwest, East Coast and Canada to glass fabricators that cut the commercial glass to size for finished products.

Moore Freight as a new transportation capability to Daseke. The commercial glass hauling market is an attractive niche with a strong margin profile. There are a limited number of providers that have the loading/unloading expertise and the specialty equipment necessary to serve the transportation requirements of construction, architectural and automotive glass.

Combined, TSH & Co., The Roadmaster Group and Moore Freight Service generated approximately $320 million in revenues and $37 million of Adjusted EBITDA during the 12-months ending September 30, 2017. Daseke’s TTM revenue including these three recently merged companies is estimated to be $1.2 billion (84% above reported results) while pro forma Adjusted EBITDA increased to $140.5 million (59% above actual 2016 results).

The combined consideration for these three mergers was about $270 million, including approximately 4.23 million shares of DSKE (valued at $53 million). The average purchase price for TSH & Co., The Roadmaster Group and Moore Freight Service was 6.5 times TTM Adjusted EBITDA, bringing the average purchase price of all seven mergers closed during 2017 to 5.9 times TTM Adjusted EBITDA. After the mergers, Daseke operates over 5,200 tractors and 11,000 trailers, along with 1.2 million square feet of warehouse space to facilitate industrial logistics and distribution operations.

The available capital for additional acquisitions (as of December 4, 2017) is $155 million ($85 million cash on hand and $70 million in a revolving line of credit).

Indicated Target

Based on comparative analysis that utilizes the valuation metric of EV/EBITDA, an average industry multiple indicates a share price target of $18.10.

READ THE FULL RESEARCH REPORT HERE

SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR.

DISCLOSURE: Zacks SCR has received compensation from the issuer directly or from an investor relations consulting firm, engaged by the issuer, for providing research coverage for a period of no less than one year. Research articles, as seen here, are part of the service Zacks provides and Zacks receives quarterly payments totaling a maximum fee of $30,000 annually for these services. Full Disclaimer HERE.