Meeting takeaways: International freight forwarding thrived
International freight forwarding continues to thrive. The lockdowns in Shanghai did not impact the international freight forwarding business as Kerry Logistics Network (KLN) had diverted its business to other airports from the Pudong airport. The company also benefitted from the sudden reduction in airfreight capacity led by the Russia-Ukraine conflict in 1H22. Trading volume between Asia and Europe/US and within Asia were higher with high freight rates sustained. With its extensive network coverage in Asia, KLN’s international freight forwarding should record strong segment profit growth in 1H22.
Higher margins amid supply chain complexity. The Western and ASEAN countries have adopted the “living with COVID” policy. This has resulted in more infections which in turn has led to labour shortages. The prolonged disruptions to supply chain plays to KLN’s strength as the company is capable of delivering flexible solutions to fulfil urgent and complicated orders from clients. This should allow KLN to command better margins during challenging times.
Mixed performance for integrated logistics business. Thanks to additional pandemic-related contracts granted by the government, integrated logistics business in Hong Kong is expected to enjoy higher margins and deliver positive profit growth in 1H22.
The pandemic-induced lockdowns in China have severely disrupted manufacturing activities and thus logistics demand. This should result in lower profit contributions from integrated logistics in China in 1H22.
Kerry Express Thailand remains in the red but losses have been narrowing. It is expected to achieve break even by end-2022. Overall, the Asia integrated logistics business should remain an earnings drag in FY22.
KLN intends to increase the proportion of fixed rate loans to mitigate the earnings risk led by interest rate volatility.
Profit growth from continued operations should continue. Strong international freight forwarding business should underpin KLN’s good profit growth in 1H22. Disregarding the contributions from the Taiwan and Hong Kong warehouse operations sold in 2H21, KLN’s full-year core profit for FY22 should also be higher even allowing for the recent retreat in freights rates for routes between China and the US led by falling exports.
Risks ahead. Faced with prolonged supply chain disruptions led by differing policies to control COVID infections around the globe and potential demand contraction caused by growing inflationary pressure, most multinational corporates have been cutting back on production. This could translate into potentially lower business volume for KLN in the future.
The stock is trading at 8.7x and 9.1 x FY22 and FY23 earnings, against its five-year average of 13.3x. Valuation is attractive even allowing for normalization of freight rates from 2023 onwards. Potential synergy with S.F. Holding could add to its long-term earnings growth. Maintain BUY with HK$21.90 TP. This implies 31% upside from the current level.