Kintetsu World Express stretches its balance sheet to grow abroad


Japan’s Kintetsu World Express is adopting a more aggressive corporate strategy to fend off the threat posed by a sluggish domestic economy, and betting on acquisitions in order to diversify its assets portfolio.

In 2015, the group raised JPY130bn ($1.2bn) of debt to finance the purchase of NOL’s APL Logistics (APLL). This was an expensive buy, but APLL reinforced the combined entity’s ranking in the top 20 freight forwarders globally.

A more balanced geographical mix weakened the capital structure of the combined entity due to the funding mix being used by KWE, while execution risk associated to M&A carries obvious risks in a soft market for forwarders. However, not only did APLL help KWE expand its global reach, but its acquisition also makes more sense now than a year ago due to a higher degree of uncertainty surrounding the Bank of Japan’s monetary policy, which has led to a stronger Yen against the US dollar since the turn of the year.

APLL marginally diluted group earnings in 2015 but equally gave a fillip to group revenues, and its integration promises cost and revenues synergies, which is why KWE paid such a hefty premium to grow inorganically outside Japan. In the Americas, it fared particularly well in the past year.

Once the contribution of APLL is stripped out, 2015 sales were marginally down year-on-year, with domestic activities under pressure – it recorded a 35% fall in domestic operating income to JPY4.1bn, which inevitably hit operating margins in Japan, down 140 basis points to 3.8% from 5.2% one year earlier.

Excluding the contribution of APLL, domestic revenues amounted to about one-third of group turnover in 2015.

Meanwhile, return on equity hit rock bottom based on five-year trailing figures, having fallen from 13.1% in 2011 to 7.9% in 2015, mainly due to the rising book value of equity. In this context, it’s too early to say whether APLL-led synergies and improving net leverage would help KWE buck the trend of declining returns over the medium term.

KWE entertained a two-for-one stock split in early October, which mildly impacted earnings per share on a comparable basis – once earnings per share (EPS) are calculated based on the assumption that the stock split took place in the first day of fiscal 2011, EPS ranged between JPY126.8 (at the end of 2012) and JPY145 (at the end of 2014), standing at JPY135 in March 2016.

Including APLL, total 2015 sales of JPY420bn were split as follows: Air Freight (40.2%, JPY168.7bn); Sea Freight (27.6%, JPY115.9bn); Logistics (24.1%, JPY101.3bn); and “others” (8.1%, JPY34bn).

Its first-quarter results a year ago were relatively soft both in terms of revenues and core earnings, so they should not be difficult to beat – we’ll learn more when this year’s first-quarter figures are released in early August.

Source: Transport Intelligence, June 29, 2016

Author: Alessandro Pasetti