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K+N

However tough the ride has been lately, “no cursing allowed” is the warning for Kuehne + Nagel (K+N) shareholders – all other signs, quite frankly, have been there for over a decade.

New vs old K+N

The shares of the world’s ocean freight leader, now trading about ten bucks above pre-credit crunch highs, languish in the low/mid-Sfr130s, simply reflecting the inability of the “New K+N” to live up to the expectations set by the “Old K+N”, which was run under the operating leadership of Klaus-Michael Kuehne. That’s the view shared by virtually all my trade sources close to the Swiss company’s affairs.

Remember the executive roulette post I penned at the end of last year? The obvious reading now: it doesn’t look good for many of its management board members.

12 years on

About 12 months before Lehman Brothers collapsed, Kuehne + Nagel was still on a roll, both on the stock market and in terms of fundamentals and operating performance, although back then, its peak operating profitability had already started to fall as a percentage of gross profits (15.5% in 2005).

(Source Google)

(Source Google)

In those years, don’t forget, its gross revenue and gross profit (at Sfr1,000) per employee, respectively at Sfr21bn and Sfr117.7 in 2007, were 5% and 54% above trailing 2017 – as well as forward 2018 – levels.

(Source K+N)

(Source K+N)

Quite simply, over time K+N has lost bargaining power with suppliers of transport services, while trying to mitigate the competitive disadvantage of most asset-light transport companies in supply chain volumes management by carefully managing operating staff costs (see “manpower expense in Sfr1,000 per employee” in the tables above and below), down ~ 30%, based on 2017 vs 2007 numbers.

(Source K+N)

(Source K+N)

It has tried to preserve operating cash flows before working capital adjustments (Sfr1.14bn in 2017, 6.2% of net revenues, vs Sfr1.04bn in 2007) as well as a deteriorating gross cash position, but whatever the much higher earnings per share (EPS) numbers might suggest, they are almost irrelevant, given a generous dividend policy that has become more seriously stretched in recent years.

In 2007, with fully diluted EPS at Sfr4,48 (2017: Sfr6.15; up 37% over the period), it paid out Sfr176m versus Sfr688m last year (up 290% in 2007-2017) – so, the more it earned, the more taxable money was clawed back to shareholders, meaning the K+N investment had become an increasingly risky income play with little paper gain upside, if any, based on my against the odds fair value estimates.

Similarly strong in 2007 and 2017, in terms of capital structure (debt/equity versus projected ebitda), its core asset mix has not changed considerably, as the two tables below show…

(Source K+N)

(Source K+N)

(Source K+N)

… while EPS has not been affected by the total share count – yes, EPS has risen but its total share count has not. It had 117m of shares outstanding in 2017, against 119.6m at the end of last year, and 2018 comparable numbers are likely unchanged.

It’s only about three weeks now before the Swiss logistics company reports its annuals, but looking at first-half 2019 numbers is more appropriate. Last year, the first half was solid for the Swiss 3PL – less so the second half. Ever since, the shares have fallen and now the spotlight is on human resources, with the latest news shared on our Loadstar Premium platform.

“Cursing allowed” may apply to many of its employees, after all.

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