If you have notice I have swap the position of FREIGHT and HAIO few days back. Okay it is definitely not because I have a quota that there must be two companies in The Great list just that I'm pretty impressed by what FMHB has done over the months of following them.
Again, these are my right brain thoughts of FMHB.
If you read my first post on FMHB, the reason I did not place them at the great is because of their tight operating margin. Well it may not. Its operating margin has been above industrial average (7.6% vs 3.3%) from Reuters only below those in the S&P 500 (16.6%). The same goes to gross profit margins (21% vs 12.7%) but still below the S&P500 (29%). Anyway, those in the S&P 500 do not compete directly against FMHB here but it is still good if they can achieve the figure. Again, previously I am a bit uncomfortable with the tight operating margin versus the rest of the choices that I have but I think it is fairer to compare them to industrial average which we see it clearly performed above them.
Why its tight operating margin doesn't bother me?
Okay, this is because the nature of FMHB business. How it works is that it takes an order from a customer and ask the transportation company in which the customer has selected to transfer its goods. That order to the transportation company is the cost of revenue to FMHB than they'll charge a premium to their customer. Then their staff will do all the paper works and there is where the SGA expenses come into play. So from here you'll see how asset light is this company and the major overhead they have is the human assets which can be "easily" although unpleasantly dealt with if you know what I mean. Anyway like it or not, it's the same for any company you work with and you'll see that pretty often if you study US businesses. Blame capitalism if you like. Back to the FHMB, asset light doesn't mean no asset at all as their tug and barge as well as warehouses still requires assets. Looking at this, you must have thought they need plenty cash to do business and yes indeed. So don't expect them to pay out all the cash as dividends because that is your working capital.
How about the high receivables then as compared to cash and liabilities?
Well there is still a little bit of a risk here BUT it is pretty unlikely to put them into trouble because they serve more than 2500 customers. So default risk is pretty low I would say.
Is this kind of business sustainable and why not just do it themselves instead?
There are few reasons for this. One being it involves lots of complicated paper works with taxes, duties, laws and etc. especially when it involves cross border transfer. So there is a lot of risks involved if you are unfamiliar with all these and you don't want to be late sending your products to your customer. Why not setup a department instead? It might not that cost effective to most because you don't send or receive products everyday or constantly. So one might end up with less productive department. And it has not counted the cost to train new staffs yet. So having a freight forwarder is a great thing to many businesses. Plus FMHB has more than 22 years of experience doing this so you might expect them to have a huge network and giving customers the best deal.
The thing that I like FMHB compare to others on the list?
What is that? They are like sotong. They expand their business either by acquisitions or JV or partnership. That is Sun Tzu-like. Freight forwarding business relies a lot on the relationship between them and their customers. So you don't jump in straight and go for a war because it'll cost you in many ways. Instead, you make friends with them leveraging on existing advantage and infrastructure. That is a win-win situation for both. If you look at it, there is one massive company who does that with great success. Who?.......I bet you know Berkshire Hathaway.
So all these make Frieght Management Holdings Bhd into my Great list.