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At first glance, the industrial transport sector seems a rather odd grouping of companies, covering everything from marine engineering and shipbroking to private aviation and letter delivery. But there is a common factor on which their performance hinges: business confidence.
Clarkson’s (CKN) financial division ran aground last year as global uncertainty meant marine capital markets were “all but closed”. The segment’s underlying operating profit plunged by more than three-quarters to £4.1m. As the world stage remains fraught with tension, it is questionable whether investors’ ‘wait-and-see’ approach will change in the near term. Shipbroking also looks likely to start 2020 on the back foot. The Baltic Dry Index, a bellwether of the shipping market, has been on a downward trajectory since September amid trade war uncertainties and fears of a global economic slowdown. The ongoing African Swine Fever epidemic could also continue to dampen shipped volumes of soybean feedstock. Despite the signing of a ‘phase one’ deal between the US and China, the index has already fallen by more than a quarter between the beginning of the year and mid-January.
Moving from the sea to the skies, Signature Aviation’s (SIG) focus on business and private aviation means demand is connected to corporate confidence. Last year saw a reduction in discretionary flying, but the group managed to outperform the wider market. While US business and general aviation movements only increased by 0.5 per cent in the third quarter, Signature’s fixed base operations network achieved organic growth of 1 per cent. The group is well positioned for a recovery in the cycle as restricted airport space and long-term leases create barriers to entry.
Back on land, as Brexit uncertainty continues to hamper business confidence in the UK, Royal Mail (RMG) has downgraded its expectations for letter volumes. Digital alternatives are already driving a decline in the number of letters being sent but, excluding political party mailings, the group now expects letter volumes to fall by 7-9 per cent in 2020 and 6-8 per cent in 2021.
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James Fisher (FSJ) is the most diverse business in this sector, operating in niche end markets such as submarine rescue and the provision of tankships. It suffered a slow start in its marine services division last year, but has since seen a strong recovery in ship-to-ship transfers, particularly in South America. Meanwhile, as the oil and gas sector rebounds, this has spurred demand for the group’s offshore inspection and maintenance services. As offshore wind gains traction worldwide, there could be significant opportunities ahead for the renewables division, adding to its existing portfolio of work in both the UK and Taiwan.
Outsiders
Tapping into consumers’ penchant for online shopping, Royal Mail’s ambition is to become an international parcels business that also delivers letters in the UK. It is aiming for over 70 per cent of sales to come from parcels by 2024, with more than two-fifths of revenue generated abroad. The question is how (and whether) this can be achieved. Shareholders have had to stomach a 40 per cent dividend cut to help fund a £1.8bn turnaround plan, which the group admits is behind schedule. The workforce accounts for more than two-thirds of the cost base and Royal Mail has struggled against cheaper rivals’ use of gig economy workers. Embroiled in yet another row with the Communications Workers Union (CWU), it is difficult to see how the group can eke out the productivity gains it needs.
| NAME | Price (p) | Market cap (£m) | 12-month (%) | Fwd PE | Yield (%) | Last IC View |
| Clarkson | 3,110 | 941 | 25.40% | 27 | 2.40% | Hold, 2,465p, 03 Oct 2019 |
| James Fisher and Sons | 2,025 | 1,019 | 6.90% | 21 | 1.60% | Hold, 2025p, 28 Aug 2019 |
| Royal Mail | 209 | 2,086 | -29.90% | 11 | 11.70% | Sell, 194p, 21 Nov 2019 |
| Signature Aviation | 308 | 2,545 | 6.10% | 22 | 4.60% | Hold, 303p, 06 Aug 2019 |
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