Kerry Logistics seeks growth to boost value

Hong Kong-based 3PL Kerry Logistics Network is chasing growth in a difficult logistics and freight market.

Its strategy is paying off – based upon solid fundamentals – but its sagging valuation on the stock market suggests Kerry will have to pull all the stops to start receiving an equity premium in the near term, while also hoping the economic slowdown in China would be muted.

Its annual results, released on March 23, showed reported revenues were flat at HK$21bn, while core operating profit rose 12% to HK$1.8bn from HK$1.6bn, which determined a 9% rise in net income to HK$1bn. That solid operating performance came on the back of careful cost management and a four-year record gross profit of HK$3.4bn.

Its total revenues are almost evenly split between the integrated logistics (IL) unit and the international freight forwarding (IFF) division. Revenues rose 4% to HK$10bn in IL, but fell 3.6% to HK$10.5bn in IFF – which is one reason why Kerry is about to wrap up the acquisition of a US-based forwarder. Financials and the name of the target are as yet undisclosed, but it’s likely that it will acquire a majority stake in a company the equity of which should be valued up to $200m, according to budget and cash flow requirements.

“The US acquisition of one of the top ten NVOCC (non-vessel operating common carrier) companies set to be completed in 2016 1H will also strengthen the group’s trans-Pacific coverage and provide position synergy effects as it works towards its strategic objective of becoming a global player,” Kerry said in its annual results.

Its IL business, which includes logistics operations and Hong Kong warehousing, which is comparatively tiny with HK$550m in sales, recorded a 13% increase in core profits to HK$1.6bn, while IFF grew core earnings by 7% to HK$361m – these changes were recorded before unallocated administrative expenses, which totalled almost HK$200m last year.

All geographical areas in its IL division – Hong Kong, China, Taiwan, and South and South East Asia –recorded strong growth in operating profits, while the HK warehouse division also delivered a strong operating performance.

Things are a bit more complicated in the IFF unit, where China – despite a 13% fall in revenue to HK$5.2bn – delivered a solid growth rate in underlying earnings, up 7% to HK$193m. However, Europe – the second-largest contributor of revenue – struggled to cope in a tough environment, experiencing a 37% drop in operating income on falling revenues.

Dividends are well covered by earnings – the conservative pay-out rose to 26% from 24% in 2014, which means its shares now carry a forward yield of 1.5%. Its gross cash position is essentially flat year-on-year at HK$3.7bn, while debts are rising but are still manageable based on its net leverage and cash flow generation.

The company added that 2016 “will no doubt bring a fair share of challenges and opportunities”, also noting, however, that the “slowdown in Mainland China, one of the world’s largest economies, is expected to have widespread effects globally”.

Author: Alessandro Pasetti

Source: Transport Intelligence, 6th March 2016