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Analyst Jefferies today updated its research on European freight forwarders, downgrading two, upgrading one and predicting DSV will buy a $1bn+ forwarder.
Noting that, while the pace of trade had picked up last year – growth in air freight increasing 10%, sea up 6% and road 4% – the analyst warned this had created “unprecedented yield pressure and a growing performance divide”.
As a result, it downgraded Deutsche Post DHL to ‘hold’ and Panalpina to ‘underperform’, estimating 2017 figures would show an organic ebit rise of just 3% for DP-DHL and a decline of 10% for Panalpina.
Predicting increased M&A activity in the forwarding sector this year, Jefferies reiterated its ‘buy’ rating for DSV – ebit forecasted at 15% – and upgraded Kuehne + Nagel to ‘hold’, on the basis of a 5% estimated rise in ebit.
DP-DHL’s downgrade was a result, it said, of “cost pressures from higher wage inflation in Germany and expected ongoing yield pressure in air freight in the near-term and sea freight in the medium term, likely further delaying the targeted recovery of DHL Forwarding & Freight.
“Competition from Amazon in Germany continues to gradually increase, which will likely slow down DHL’s parcel volume growth.”
Panalpina, meanwhile, it anticipated would not be a target of a takeover at current valuations.
“Panalpina’s restructure-driven earnings recovery has so far failed to materialise, with its financial performance further deteriorating following the strategy update in September 2016. FY17E results on March 7 are expected to reflect a 10% lower ebit, due to unprecedented yield pressure, following rising freight rates.
“With yield pressure expected to persist, FY18E consensus EPS estimates are looking about 20% too high. After Panalpina’s ebit dropped 30% in H1 17, its share price surged 30% over the last six months on the back of takeover speculation.”
K+N was faring better, it said, “in view of improving earnings momentum with a pick-up in ebit growth to 11% this year, on the back of an improving conversion ratio towards the target of at least 16% for the group by FY22E under the KN+NextGen strategy.
“FY17E results on March 7 are expected to reflect underlying ebit growth of about 5%, driven by accelerating volume growth, to 8% in sea and 22% in air freight, offset by yield pressure caused by higher freight rates and pressure on conversion ratios.”
DSV remains the “best-in-class” forwarder, says Jefferies, and anticipates it making some sizeable acquisitions this year.
It has “the strongest earnings growth track record, the highest yields and profit margins and lowest sensitivity to freight rate volatility, with 75% of gross profit generated by value-added services”.
“FY17E results on February 8 are expected to reflect the strongest earnings momentum in the sector, with estimated ebit growth of close to 40%, versus relatively stable earnings for its peers, driven by estimated organic growth of 15% and accelerated cost savings of Dkr700m ($116m) from the integration of UTi.
“With the integration of UTi largely completed, DSV indicated it will resume its acquisition strategy, with an appetite for relatively larger targets worth more than $1bn.”
The analyst noted that air freight rates were some 30% higher last year, but yields were down by 8% on average, “after a 9% decrease in Q4 17E versus Q3 17, caused by a spike in air freight rates, which could not be passed on to customers”.
K+N saw air freight volumes grow 22% in 2017, with “the key volume drivers including robust exports from Asia and Europe, growing e-commerce, and new business in the pharmaceutical, hi-tech, aerospace automotive and perishables industry verticals, as well as by the acquisitions of CFI Commodity Forwarders in the US and Trillvane in Kenya in perishables logistics, contributing about 10% to volume, but with estimated 50% lower yields”.
DSV’s volume growth was estimated at 10%, while Panalpina, “somewhat lagged” at 8%.
In sea freight, it noted Alphaliner’s prediction that container volume growth would be 6.5% for FY17E, ”implying growth of around 5% for Q4 17E”. It increased its FY18E growth forecast to 5%, with global trade expected to further recover. The SCFI increased 26% in 2017 over 2016.
Average forwarder volume growth was 6%, said Jefferies, with “Kuehne+ Nagel and Deutsche Post DHL slightly above market growth, DSV in line and Panalpina below market growth”.
“This was offset by estimated yield pressure of 6% on average, reflecting higher container freight rates that could not be passed on to customers, after a 4% recovery in 4Q17E. We estimate yields of Deutsche Post DHL and Kuehne + Nagel were most affected, while DSV’s sea freight yield remained relatively stable, due to a lower exposure to high sea freight rates.”
Sea freight volume growth is anticipated to be 4-5% this year.
Meanwhile, Jefferies predicts that there will be big M&A deals this year.
“We think further consolidation is likely in view of the growing divide in financial performance, with DSV, XPO Logistics and Maersk among the most likely acquirers.”