K+N out performs again but underlying demand is still mediocre

Kuehne + Nagel increased both its market share and its profits in 2013 but the underlying market conditions remain uninspiring. Results published this week show that turnover was up by 0.8% but underlying profits in terms of EBIT (Earnings Before Interest and Tax) rose by 9% at CHF761m.This appears to be a performance driven by a greater ability to work its assets profitably than any growth in the sales of the company but it also illustrates a continuing ability to increase market-share.

The core sea freight business saw volumes higher by a rather unexciting 3%, yet turnover was down 0.7% and gross profit up only 0.3%, suggesting weak container rates which is surely no surprise. At CHF408m, profits in terms of EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) were also down by 1.7%.

What was more of a surprise was the air freight performance. Here volumes grew by 3.8% in what was generally a declining market, whilst EBITDA grew by 7.9% to CHF247m. This performance was put down to the ability to market integrated products to specific industries.

Even more impressive was the continuing recovery in the contract logistics business. Turnover was hardly spectacular with an increase of 4.5% but EBITDA leapt by 27.3% even allowing for heavy depreciation. This division is now returning a margin of 4.1% which is not quite as high as CEVA’s 5% but is still one of the better performances in the contract logistics business. Similarly to CEVA it appears that much of the recovery was down to heavy cost cutting and attention to working assets however K+N mentioned that “globally operating customers with complex logistics requirements” and e-commerce also helped so the trend may be sustainable.

Unfortunately the ‘Road and Rail’ continued to struggle, teetering on the edge of profitability with a 1.1% margin and a 2.7% fall in revenue.

Kuehne + Nagel continues to outperform most of its rivals despite difficult markets. It is financially very sound, illustrated by an extraordinary dividend paid this year. However what it needs to re-ignite its business is a return to growth of world trade, something which might happen frustratingly slowly.