Maybe it’s a byproduct of getting older and having a few decades of investing experience now, but I’ve increasingly started incorporating “hassle factor” into my investment process – some companies are simply very difficult to follow, model, and/or value, and it makes sense to consider whether the prospective returns are adequate in light of the work required and the risks that may come with inadequate or incomplete information.
This brings me to Reysaş Taşımacılık ve Lojistik Ticaret (RYSAS.IS)(OTCPK:RYSKF)(“Reysaş Logistics”), a leading logistics player in Turkey and the first (I believe) to list on the Turkish stock exchange. While there is a lot of appeal to a growing logistics operation in a country that often serves as a manufacturing hub and outsourcing destination for companies wishing to sell in the EU, there are multiple issues with this company/stock as an investment vehicle. Not only does high inflation in Turkey create modeling challenges, but the company does not offer a lot of information to investors and there is very, very little available to English-speaking investors.
I know enough Turkish to get by when it comes to analyzing Reysaş, but even with that I find a frustrating lack of information. With that, while I do see a good runway for long-term growth and I can argue that the shares are undervalued today, I cannot in good conscience recommend that investors buy these shares unless they are prepared to go above and beyond and put in serious and significant effort to follow this company and keep tabs on developments in the business.
A Solid Logistics Operation In A Popular Manufacturing Destination
Founded in 1989, Reysaş Logistics has grown into a diversified logistics company operating within Turkey. While the core of the business revolves around truck-based transportation, warehousing, and related services, the company does have additional capabilities in areas like air, rail, and water, as well as services like customs, forwarding, and expediting.
The Domestic Transportation and Distribution business operates over 600 trucks and handles distribution and other logistics services for a range of industries, including food/beverages, dry cargo, liquids, electronics, and petroleum products. The company also has a sizable operation (150+ vehicles) dedicated to automobile logistics, moving cars from factories to dealerships and/or to ports and other points of export.
Turkey is a comparatively young country that is still growing and likely to continue growing for some time. The more interesting opportunity for Reysaş to me is in facilitating ongoing growth in manufacturing and export. Turkey has long been a popular manufacturing location for companies wishing to leverage lower manufacturing costs and then sell into the EU. Over 40% of Turkey’s exports go to the EU, and it’s a popular manufacturing location for a range of goods including appliances, cars, clothing, electronics, and machinery, as well as commodity products like steel (sheet steel, as well as bar and wire).
As many companies learned harsh lessons about the risks of extended supply chains during the pandemic, I do believe that Turkey has an opportunity to benefit from “near-shoring” activity that will see companies attempting to source more inputs (and/or finished goods) from Turkey in place of China, India, Vietnam and so on. Although relations between Turkey and the EU have not always been cordial, there’s a basic underlying economic reality that this is a relationship that works for both parties.
Conglomerate Operations Add To The Complexity
Durmuş Döven founded the company and remains the chairman to this day, owning around 18% of the shares (a relative, Egemen Döven, owns about 12%). As is often the case with these arrangements, there has been some “mission creep” with Reysaş, and it is not a pure-play logistics company.
In addition to the core Logistics operations, Reysaş operates a tobacco distribution and marketing business (“Tütün”), as well as a rail operation (Demiryolu). Those are both reasonable enough extensions of the core logistics business (the rail operations in particular), but the same cannot be said of the vehicle inspection business (Taşıt Muayene), a business which operates eight fixed vehicle inspection locations and five mobile services.
The company also has a sizable and somewhat convoluted real estate operation. It absolutely makes sense that the company would have significant warehouse-based real estate assets (84 warehouses in 13 provinces), and the company continues to invest heavily in expanding its asset base here. Likewise, the formation of a warehouse-focused real estate investment partnership (Reysaş GYO, in which Reysaş maintains a majority stake) makes sense. Where things get stranger is the ownership of two hotels (both branded as Hiltons) and the construction of a third hotel.
Unfortunately, the company offers minimal information about any of these operations on a regular basis. So, investors more accustomed to the level of volume and pricing data that is provided by companies like Hub Group (HUBG) or J.B. Hunt (JBHT) are going to find Reysaş’s operations far more opaque apart from quarterly financial reports (which also don’t include many underlying details).
The Outlook
Finding reliable data on the Turkish warehouse sector is not easy. Nevertheless, I can say that with ongoing growth in trade through Turkey (imports and exports), as well as domestic growth and the earthquake earlier this year, quality warehouse space is at a premium, and particularly warehouses with large interior space (not all square footage is equal, and larger facilities earn premiums). To that end, warehouse rents have been growing at a double-digit rate (as measured in U.S. dollars) since 2021 and at midyear 2023 rates were up more than 40% from the year before.
These are good times to be in the warehouse and logistics space. Moreover, Reysaş has resources and experience that many smaller players don’t have – through partnerships like Reysaş GYO, the company has access to capital on better terms than many smaller players and can afford to continue acquiring land and building warehouses. That’s going to put significant pressure on free cash flow in the near term, but I think the long-term benefits to expanding its warehouse asset base are considerable.
The high rate of inflation makes modeling considerably more challenging now, and so I think this is a case where shorter-term approaches like EV/EBITDA have some advantages. Based on the company’s track record of profitability and the investment spending its committing to building its warehouse footprint, I think a 10x forward multiple on my EBITDA estimate is reasonable, and that gets me to a fair value about 15% above today’s price (basically on par with the mid-June and late-August highs).
The Bottom Line
I love the idea of owning exposure to Turkey’s growing logistics sector. Given my expectations that Turkey will continue to grow as a key regional manufacturing and export hub (not to mention the ongoing growth of Turkey’s own economy and the expansion of ecommerce), I think there will be healthy demand for transportation and warehousing for years to come, and Reysaş has already established itself as a major player in the market. I also think that the valuation is reasonable in that context.
All of that said, the difficulty level on this one is sky-high. It’s a tremendous task for investors who can’t read Turkish to get necessary information, and even for those who can, there is still a decided lack of detail that many investors likely now take for granted. I can understand the idea of buying a theme and I do think Reysaş is a valid way to do that (it is, for instance, part of the iShares MSCI Turkey ETF (TUR), which I argue helps backstop its legitimacy), but by no means is this an easy stock to own or an appropriate investment for many readers.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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