Transport & logistics group Cargo Carriers is on the acquisition trail. Joint CE Murray Bolton hopes the purchase of recession-hit competitors will enable Cargo to achieve its ambition of becoming a R1bn turnover company within five years.
To do that, it will need to more than double its size. In the past financial year to February 2009, JSE-listed Cargo recorded a 14% turnover increase to R483m.

Cargo has two operating divisions: CargoSolutions, which focuses on supply chain management, systems and software; and Cargo Trucking. The latter specialises in the transport of sugar and industrial goods. These include chemicals, fuel, cement and steel.
With the sugar harvesting season in full swing, Bolton says Cargo’s sugar carriers – mainly in Swaziland – are working at full capacity. The rest of the fleet is operating at about 80%. This apparently healthy activity is misleading. In good times, Cargo makes extensive use of subcontractors and owner-operators. Recession has changed that.

“Our industrial activities were going great until October, then everything fell off the precipice,” says Bolton. “Tonnages halved over the next few months. We trimmed back our capacity significantly in the industrial sector.” Subcontractors were shed. “March was the worst month but though we’ve seen a pick-up since then, revenues are still down 30% on this time last year.”
Factor in cost increases of 8%-10% and Bolton reckons volumes are down about 34%. A saving grace has been the drop in fuel prices since mid-2008.
Sugar looks strong for now but, even there, Bolton takes nothing for granted. “The crop this year looks reasonable but there has been talk of a possible El Niño weather pattern in 2010, which could create lousy growing conditions.”

He believes industrial (in)activity has bottomed out and transport operators can expect a gradual improvement in business. But it will be slow – which is why he thinks this is the right time for Cargo to grow through acquisition.
“There are a lot of distressed transport companies out there. Some need a capital injection to keep their heads above water. Others can’t grow their business as they want to and need a partner.”

Though Bolton reckons Cargo will need to almost triple its fleet of nearly 300 vehicles to service the R1bn turnover target, the prime consideration in selecting takeover targets will be the transport contracts they bring with them. He would prefer them to be in product sectors Cargo specialises in, “though we would consider others if we get immediate critical mass”. Cargo previously considered branching out into coal and vehicle transport but decided against it.
The company will not insist on 100% acquisition, says Bolton, “but management control is non-negotiable”. Some potential targets have been identified but “we have had no serious talks yet”.

Cargo has R60m cash immediately available but Bolton expects that won’t come close to covering the eventual acquisition bill. By transport industry standards, Cargo’s debt ratio is low and the group is confident of its ability to attract bank finance. “We haven’t considered going to the JSE. The group’s diktat is that our debt:equity ratio should be no higher than 50%. Our current net borrowing is 28% of equity so I think we are undergeared.”
Cargo is not limiting its search to Southern Africa. For sugar, it wants to diversify out of the regional harvesting season. Malawi and Tanzania are potential expansion targets – with small growers particularly in mind – but Bolton is also looking further afield. Illovo Sugar, one of Cargo’s existing clients, is expanding into Mali in West Africa. “We’ve also put out feelers in Angola.”
Industrial acquisitions across the continent are also possible. But Bolton insists there is no rush to spend. “Though we have cash available, it is not burning a hole in our pockets. To be rushed into acquisitions for the sake of growth is dangerous. ~ David Furlonger