Compañía de Distribución Integral Logista Holdings, S.A. (LOG SM) is the leading distributor to proximity retailers in Southern Europe (Spain, Portugal, France and Italy): the group distributes mostly tobacco products but also convenience products, top-ups, pharmaceuticals, books, publications and lotteries to some 200,000 points of sale accessed every day by around 45 million consumers. In addition, Logista distributes to wholesalers in Poland.
Logista was originally spun-off from Tabacalera in 1999 when the Spanish tobacco group merged with its French counterpart SEITA to form Altadis. In 2007 Imperial Tobacco (today Imperial Brands) acquired Altadis for €16bn, including its 60% stake in Logista, and then proceeded with a take-out offer for the remaining shares it didn’t own, valuing the entire Logista at €2.3bn.
In 2014 Imperial Brands then relisted Logista on the Spanish stock market through an IPO, and today still holds a 50.01% stake (but Logista has an independent management team).
While tobacco and convenience products still account today for 70% of total economic sales (*), the company has been migrating towards other related activities, taking advantage of the valuable network it has with retailers. Logista runs its own proprietary order-management software (PoS terminals) from which it manages supply-demand from consumers and suppliers; additionally, it has a proprietary distribution network in Europe with 37 central warehouses and 610 proximity warehouses.
(*) As per the company’s definition, economic sales are roughly equivalent to gross profit, and is simply revenues minus procurements costs (particularly relevant for tobacco products).
Tobacco products: leading distributor in Southern Europe for cigarettes, cigars, roll-your-own and tobacco for heating
Convenience products: stationery, confectionery, food, beverages and technology appliances
Pharma: Logista provides both hospitals and pharmacies with a comprehensive distribution service in Spain and Portugal
e-transactions: leader in distributing electronically rechargeable products and services in Spain and France (top-ups for transport cards for tens of urban and metropolitan transport organisations, telephony top-ups working with practically all operators, parking cards, gift cards, electronic money, prepaid cards, cash back operations, etc.)
Transport solutions: Logista has a comprehensive and specialised offer of transport services, whether parcels and express couriers (Nacex, with a network comprising 31 platforms and over 300 franchises in Spain and Portugal) or temperature controlled (Integra2, specialised in the pharmaceutical and food industries), including long distance and full load transport management for high value products
Books and publications: Logista provides publishers with the broadest distribution service
In 2022 Logista acquired 70% of Speedlink Worldwide Express (with an option for the remaining 30% over the next 3 years), a B2B specialist in time critical deliveries to and from Belgium and the Netherlands for the healthcare, high tech, automotive and e-commerce sectors, thus enabling the company to expand its Nacex’s services to Benelux.
Business model
Contrary to market sentiment, Logista’s business is certainly not sexy but neither a melting ice cube.
In its most important segment, the number of smokers worldwide is rapidly decreasing, with the volume of cigarettes sold falling by 1%-2% annually (much higher in some countries). Despite this, the global market for cigarettes is still estimated at $800 bn, and revenues are still growing at 2.5% annually (source: Statista), even in the most mature markets, thanks in part to sustained price increases and the introduction of the so-called next-generation products (e-cigarettes, heat-not-burn) which have registered very strong growth. And Europeans are still smoking a lot.
The new products are expected to lead growth, as traditional consumers turn to them to quit smoking, and they become the preferred option for younger generations. Although regulation will continue to play a major role in the market, Logista is well-positioned to benefit from the opportunity that this new emerging product category offers, adding long-term growth for the company.
Additionally, Logista’s business model is protected by high barriers to entry (high switching costs): not only it provides value-added services to tobacco manufacturers through its technology systems, but the regulatory requirements of neutrality and universality limit competition between distributors.
Regulation: as far as I know, the tobacco distribution sector is only regulated in five countries in the world (Spain, Italy, France, Hungary and Austria), and Logista has a presence in three of them, where the relations between tobacconists, wholesalers and manufacturers are governed by the principle of neutrality and supervised by the respective tobacco market regulators. Under this principle, wholesalers must deliver orders to tobacconists regularly, under similar conditions of service for all shops, so as to guarantee neutrality of supply. In regulated markets, manufacturers must ensure that their tobacco products reach the entire geographical scope of the monopoly, which is why it is usually a requirement in distribution contracts with wholesalers that they cover the entire territory concerned.
Long-term contracts: Logista enjoys long-term contracts with high visibility from customers. In total, it has more than 50 contracts with tobacco manufacturers in Spain, over 30 contracts in France and more than 35 contracts in Italy. These contracts between its subsidiaries and each tobacco manufacturer are independent for each country, so the renewal periods per manufacturer and country are not the same. The contracts have an initial term of between 1 and 4 years and provide for an automatic extension of this term from one to two years, unless either party terminates the contract. Despite the manufacturer’s freedom of choice of distributors, Logista has managed to maintain and renew all contracts at the end of their term or shortly after the expiration of that term.
One-stop-shop for retailers and a highly attractive network for suppliers: the company’s service offering covers the full value chain, thus providing a “one-stop shop” solution for its clients, offering guaranteed access to all retailers in core markets and ensuring that all manufacturer's products are delivered upon request.
Market share: being the leader in the market offering real-time supply-demand tracking through PoS terminals increases the value of information given to clients about market trends and maintains client’s captive.
Logista acts as an outsourced tax collector for governments (excise duties and VAT on tobacco products): depending on timing, it often has a significant duty creditor position and positive cash balances, which contribute to its negative working capital (currently around €3 billion). As such, the company has virtually no long-term debt, though it borrows through a credit line €40 million annually. Almost all of this cash is indeed restricted, but can be managed for a profit: it has a commercial loan agreement in place where Logista lends, on a daily basis, its cash surpluses to Imperial Brands through a cash line with a maximum drawdown limit of €2.6 billion at an attractive cost equivalent to the ECB reference rate + 0.75% until 2024 (automatically renewable for additional one-year periods). This is not immaterial, as on average it represents 7%-8% of EBIT and could potentially be higher over the next few years.
All these elements combined give the company a clear competitive advantage that is reflected in an average ROIC of c.18% which is sustainable over time.
Logista is also protected against inflation: the gross tobacco distribution margins vary according to volume (higher volumes = a lower gross margin per reference for Logista), and the gross margin includes various services such as procurement, warehousing and stock management, order preparation, delivery, invoicing, customer service and after-sales, among others. Logista normally updates its gross margin table on an annual basis, updating its fees based on the CPI, its fuel costs, the market and the complexity of distribution.
Valuation
Today Logista is valued at around €2.4 bn, more or less the same price as when it was re-listed in 2014 despite profits being up +72%.
Although Logista operates a business with declining volumes, the company has been able to grow its tobacco and related business by 2% per year since 2014, and overall economic sales have been up +2.6% p.a. (they were +3% in the first six months of 2022 to March): this increase came from higher commissions and more services billed to clients, and cost savings, which helped to maintain EBIT (+6.3% p.a. over the same period) and cash flow growth (**), used to self-finance the business diversification into pharma and transport.
(**) Accounting cash flows can show significant variations due to swings in working capital when governments change the dates of excise duty collection, such as in 2020-2021 due to the COVID-19 pandemic. WC requirements ex-tax duties are not significant.
Currently Logista trades at a P/E of 13x, FCF yield of 5.2% and a dividend yield of 6.6% (all data as at July 5). It can be considered a cash cow that is distributing almost all its cash to shareholders: management has stated that maintaining the current dividend policy is “a priority in any scenario” (in addition to dividends there are also some small buybacks).
Current CEO Íñigo Meirás was appointed in 2020 and had previously been CEO of Ferrovial (a large Spanish construction and logistics group that also runs toll roads and airports) for ten years, where he directed the international expansion and diversification process of the company, both priorities for Logista today.
What could go wrong?
Regulation: Logista operates in markets with a state monopoly for the retail sale of tobacco products: this model offers significant advantages to manufacturers, retailers and authorities alike (tax, healthcare and consumer), but we can’t rule much more liberalisation of these products.
Client concentration: Logista receives a significant portion of its revenues from its main customers (Imperial Brands, Philip Morris International, British American Tobacco and Japan Tobacco), and the possible loss of any of them could negatively affect its business. Having said that, the company has long- term contractual relationships with all Big 4 tobacco manufacturers and has been able to maintain those relationships for almost 20 years.
Elasticity of demand: given the addictive properties of nicotine, the demand for tobacco products is quite inelastic and manufacturers are able to offset drops in volume with higher prices. This argument has proven right in the past with volume decreasing but the market rising in absolute euros. The risk is that this thesis breaks down due to abnormally high tax increases. Taxes as a share of the average retail selling price a pack of 20 cigarettes are between 78% and 84% in Southern Europe: sin taxes are a good way for governments to raise revenues, especially now that fiscal deficits in the target markets are sky-high. In addition, the price elasticity can change over time due to anti-tobacco policies.
Large controlling shareholder: Imperial Brands is a large (50% shareholder): were it to decide to sell this this position, it would create significant selling pressure on the stock.
To summarise
Logista is the typical good deep-value investment: a mature company with high revenue visibility, resilient business model, captive customers, no debt, decent profitability, robust economic cash flow profile and attractive shareholder returns.
The market is currently pricing it for 0% long-term nominal growth focusing on declining tobacco volumes, but as discussed above the company managed to grow tobacco-related revenues at ~2% since FY15. Plus, management is betting on the pharmaceutical distribution business as a new engine of growth.
The expansion into wider logistics-transport businesses may help to diversify away from a declining tobacco business and ease ESG concerns. The pharma business still only accounts for 7% of economic sales, but the distribution of vaccines during the pandemic should lead to new pharmaceutical contracts.
The management voiced their commitment to diversification and will pursue it through bolt-on M&A: the balance sheet has ample room for investments while preserving dividend payments. Preference will be for one-at-a-time small/medium-sized deals in very fragmented markets, primary non tobacco-related, reducing execution risks. A clear example: the total cost for Speedlink (should Logista acquire the remaining 30%) will be only €25 million.
It is a good company but also one of Europe's longest standing value traps (same as Correios Portugal probably). I was briefly invested last year but got frustrated by the price dynamics. Also the "anti-ESG" angle does not help (at least in the short term)