Result Analysis: Boosted by international freight forwarding operations
- Excluding discontinued operations, 1H22 core net profit jumped 96%, exceeding our estimate by 26%
- Contribution from international freight forwarding more than doubled in 1H22
- Narrowing losses from Kerry Express Thailand in 2Q22
- Maintain BUY with HK$19.80 TP
Excluding discontinued operations and net fair value changes on investment properties, Kerry Logistics’ 1H22 core net profit surged 96% to HK$2.37bn mainly boosted by substantially higher contributions from international freight forwarding. The result was 26% above our estimate mainly due to stronger-than-expected profit contribution from integrated logistics and international freight forwarding, and gains on stake disposal of Asia Airfreight Terminal. Interim DPS grew 33% to HK$0.28.
Core operating profit was 37% higher at HK$3.46bn thanks to significantly improved earnings from international freight forwarding. Excluding the shortfall from the Taiwan business and the Hong Kong warehouse that were sold in 2H21, segment profits from continuing operations would have grown by 74% despite the earnings drag from e-commerce & express business.
Operating profit from international freight forwarding more than doubled to HK$3.4bn, with substantial growth from the Americas region. Thanks to high freight rates and the acquisition of Topocean in Apr-22, profit contribution from Americas more than tripled to HK$1.61bn, accounting for 47% of the total profit from international freight forwarding. Meanwhile, despite the lingering pandemic situation, profit from China and Asia rose by 61% and 129% respectively. Overall gross profit margin improved 3ppts to 7.4% (1H21: 4.4%).
Despite weaker performance from China, profit from integrated logistics increased 28% to HK$717m aided by higher contributions from Hong Kong. Driven by the additional pandemic-related contracts from the government, the Hong Kong segment, representing c.55% of the total integrated logistics segment profit, registered 88% growth to HK$393m, with margin advancing by 8.3ppts to 17.4% in 1H22 from 1H21’s 11.1%. On the other hand, profit contribution from China fell 11% to HK$159m due to disruptions amid pandemic-led lockdowns.
In 1H22, the e-commerce & express segment recorded an operating loss of HK$393m, compared to a profit of HK$209m in 1H21. This was mainly due to the aggressive pricing approach in response to the intense price competition faced by Kerry Express Thailand (KET). Despite a loss, the company has continued to gain market share with delivery volume growing by 35.7% in 1H22. Market competition has exhibited signs of easing and losses from KET has gradually narrowed since May-22. As such, the segment is expected to reach close to breakeven by the end of 2022.
Due to the acquisition of Topocean and K-Apex, the company turned into a net debt position of HK$1.6bn in Jun-22 from Dec-21’s HK$3bn net cash. This represents 8.8% of the shareholders’ fund. The company remains financially sound to pursue accretive acquisitions when the opportunity arises.
Soaring energy prices and growing inflation would inevitably dampen the global economic growth, thus lowering global demand. This should exert pressure on freight rates which has been normalising since mid-22.
While the near-term outlook of international freight forwarding becomes more challenging, KLN has expanded its global coverage through M&As. Following the acquisition of Topocean, KLN has grown to be No.1 NVOCC in transpacific trades. This enables KLN to offer innovative and customized solutions to its clients amid supply chain disruptions.
Moreover, synergy from the integration with its parent S.F. Holding has been coming through and should be growing over time. KLN is now the international arm of S.F. Holding. As the principal service provider outside Mainland China for S.F. Holding’s international business, KLN should be able to secure new customers in Mainland China, China-based companies in particular. It also serves as the exclusive cargo General Sales Agent (GSA) for S.F. Airlines from May-22. The integration should expand KLN’s scale and coverage. This should help to make up the earnings shortfall caused by the normalisation of freight rates and play a crucial role in driving the company’s long-term growth.
Kerry Logistics is trading at 8.2x and 9.7x PE for FY22 and FY23, which compares favourably with its 5-year average of 13.0x. While softening freight rates should weigh on the company’s near-term profitability, we remain positive on the company’s long-term outlook. The acquisitions of Topocean and remaining stake in K-Apex should solidify its competitive edge in international freight forwarding business. Integration with its parent company, SF Holdings, should add spice to its earnings growth and consolidate its leading position among Asia logistics plays in the long run. Maintain BUY with TP of HK$19.80, premised on 11.6x FY23F PE.
