Loscam, the cash cow of freight, is on the market

According to The Australian, Loscam has bidders circling the logistics company around $3b price tag.

If you don’t have a background in logistics then you may not have heard about Loscam, it’s a pallet rental company and it is no joke. They reportedly have an annual EBITDA of $200m with their revenue stream as predictable as an established SaaS company.

So who are Loscam and why am I so bullish on their future?

Here’s the story:

Business Overview

Loscam has a setup very similar to ASX listed company, Brambles, who operate a pallet rental hire business model under the name CHEP. The way these businesses lease out pallets to their customers is genius. The combination of how frictionless the business model is and the nature of ongoing operational dependency for pallets, makes it incredibly sticky in terms of customer retention.

Rather than sell the pallets they have customers open up an account with Loscam, they then provide them with with the pallets for a daily rate. Sounds simple enough and just like other rental companies right? Here’s where it gets creative, instead of returning the pallets, when a carrier picks up the freight the customer (“Customer A”) will transfer the pallets to the carrier’s account with Loscam and, once the carrier delivers the freight to the end customer (“Customer B”), they will then transfer it to their account. Customer B will then either use those pallets to ship their own freight or they will have the carrier pick them up when they next return.

This means the pallets are constantly in circulation around Australia with Loscam receiving payments from each link in the supply chain.

And the best part?

If someone loses or damages the pallets, they keep paying the rental fee until they either find/fix the pallet or report it to Loscam, once it’s reported, Losam will charge them a fee to replace it.

Pallet control is such an important part of logistics that there are whole teams devoted to making sure they all come off the accounts when they should. In 2010 Bunnings owed CHEP $11m after amassing tens of thousands of pallets and failing to return them.

I did a little bit of digging around and found that pallets last around 10 years before being replaced. It costs $30 to put together a pallet and the daily hire rate for a pallet is around $0.25, so it takes 4 months to pay off the pallet. Over that 10 year period they make 30x on their $20 investment, even assuming they lose 5% a year and are unable to recover the cost it’s 24x. When you’re talking about millions of pallets in circulation, that’s a pretty sizeable ROI.

So why doesn’t anyone aside from CHEP (Brambles) and Loscam just buy pallets?

A customer or carrier doesn’t want to own the pallets because they’re unable to get them back until the freight has been removed at which point it’s unlikely that they’ll actually get them back and, if they do, they then need to worry about storage. It essentially has to be handled by a third party. However, another third party would find it extremely hard to enter the market as it would mean each customer & carrier in the chain would need to sign up for a new account in order to transfer the pallets, creating a whole lot of friction in an industry that has little tolerance for inconvenience.

The $65 billion Australian Freight Market is expected to grow by 30% over the next 5 years and Loscam has well and truly sunk their teeth into the market. I am very bullish on their ability to grow with the market.

Here’s the Deal

It’s speculated that Loscam will fetch a purchase price around the $3b mark. We can take a look at Brambles, which is publicly traded, to determine a estimated valuation for Loscam. Brambles are on track to post a $3.6b EBITDA for FY24 and they are valued at $20.2b, implying a 5.6x multiple on current earnings. Assuming the reported $200m EBITDA posted by Loscam is correct, that multiple would land us at just $1.1b.

At this stage there isn’t too much information available but there seems to be a disconnect somewhere.

The bidders in the mix include Brambles, however given the Australian market is effectively split between CHEP (Brambles) and Loscam, I would think the ACCC would block that deal to prevent a monopoly.

It’ll be interesting to see how the deal plays out.

Thanks for reading,

Archie Sampson, Founder of Prepped