Result Analysis: Tumbling air and ocean freight rates to blame
- FY23 core net profit tumbled 78% to HK$777m on sharply reduced contribution from the IFF segment
- Yet, IL and IFF segments still recorded CAGRs of 9% and 23% in earnings contributions during 2019-23
- Collaboration with S.F. Holding to drive long-term growth
- Maintain BUY with TP HK$10.3
FY23 earnings fell short of expectations on weaker-than-expected IL contribution. Kerry Logistics Network’s FY23 core net profit plummeted 78% to HK$777m, primarily led by sharply reduced contributions from International Freight Forwarding (IFF) segment. The result was c.15% below our estimate mainly due to weaker-than-expected profit contribution from the Integrated Logistics (IL) segment. Final DPS was 66% lower at HK$0.13. This brought the full-year DPS down 67% to HK$0.22, representing a payout ratio of c.50%. In Dec-23, Kerry Logistics Network (KLN) declared a special interim dividend by way of distribution in specie of its shares in Kerry Express Thailand (KEX). Including the special interim dividend, equivalent to c.HK$0.594/sh, total dividend for the period would be HK$0.814.
Reduced contributions from both IFF and IL segment. IFF’s operating earnings plunged 70% to HK$1.4bn due to tumbling freight rates amid post-COVID market normalization and weaker consumer demand. Gross margins eroded to 3.6% in FY23 from FY22’s 5.9%. Meanwhile, operating profit from IL business was also 7% lower at HK$1.3bn mainly dragged by weaker performance from Hong Kong. Contributions from Hong Kong fell 24% to HK$591m as FY22 result was boosted by pandemic-related contracts from the government. The shortfall was compensated by growth of 17% and 11% in contributions from China and Asia regions, benefitting from cost saving initiatives in China and stable performance of Kerry Siam Seaport in Thailand. Overall, gross profit margin for the segment was stable at 8.6%. (FY22: 8.8%). Despite lower contribution in FY23, the IL and IFF segments saw respective 4-year CAGR of 9% and 23% between FY19 and FY23.
Express business no longer an earnings drag. KLN just completed the distribution of shares in Kerry Express Thailand (KEX). This discontinued operation has been loss-making with operating loss widening to HK$1bn from FY22’s HK$854m given the highly competitive operating landscape. Following the distribution of KEX shares it held, KEX will no longer be a drag on KLN’s earnings. KLN should be able to focus on integrated logistics and international freight forwarding, thus bolstering the overall long-term profitability.
Expanding exposure in the IFF segment. In 1Q24, KLN acquired a majority stake in France’s Business By Air SAS, an upstream supply chain specialist in air freight services for diverse industrial clients in verticals. This should further solidify KLN’s position in the EMEA region and extend its services into niche verticals.
More collaboration with S.F. Holding. Elsewhere, KLN has further strengthened its collaboration with S.F. Holdings including a joint venture for Ezhou Airport. This would play a key role in driving the company’s long-term growth.
Financially sound despite weaker credit metrics. Net debt stood at HK$2bn as of Dec-23, up from Jun-23’s HK$470m. This represented 12% of its shareholders’ funds. EBITDA/bank interest headed lower to 6.8x in FY23 from FY22’s 23.4x while Debt/EBITDA rose to 2.55x from 1.27x. Despite these, KLN remains financially sound in our view.
Good long-term value. Currently, the stock is trading at 9.7x and 8.9x P/E for FY24-25, below its 5-yr average of 13.9x. While the global economic outlook should remain uncertain in the short term, KLN achieved positive earnings growth in 2M24. Potentially lower interest rates should revive demand led by restocking initiatives from retailers. Longer term, synergies with S.F. Holding should allow KLN to consolidate its leading position among Asia logistics players, which bodes well for its long-term earnings growth and valuation. BUY with a TP of HK$10.30 based on 10.8x FY25F PE (c.0.5SD below its 5-year average).
