Analysis: supply chain slowdown could turn into a horror movie for the star players
“The only way around is through” – Robert Frost A global recession could be just around ...
Swiss forwarder Panalpina managed to create value for shareholders last year, despite challenging trading conditions which impacted its underlying profits and cash flows.
It released fourth-quarter and annual numbers yesterday, when its management team told The Loadstar that 2017 had been “a solid year”, and 2018 would be another year of consolidation for the freight forwarder.
President and chief executive Stefan Karlen acknowledged that there was still work to do in certain divisions, but there remained tailwinds in the air freight business, the group’s largest net revenue contributor.
“We were certainly able to perform very well on the air freight side. Despite the high carrier rates and certain dynamics, we managed to improve profitability quarter-on-quarter, as well as margins. We have done a great job there.”
“On the ocean freight side, we are not where we want to be; we are not happy with the results, but everybody in the market has suffered in terms of profitability. Our people in Ocean Freight have worked hard and done a great job, but given the customer mix, which is dominated by SMEs and the outdated legacy IT system which we are replacing, there is only so much they can do.
“At the end of the day it was a margin issue. We made Sfr17 ($18) gross profit less per teu than in 2016, which amounted to Sfr26m less gross profit. That’s what pushed us into the red, but we will continue to execute our strategy.”
“In Logistics, we have optimised the operations in several warehouses and stepped up our value-added services in the past two years, and we continue to see positive developments. All in all, solid results across the board.”
Well into the first quarter of 2018, the latest industry trends should not bring any nasty surprises, either.
On first-quarter expectations, chief financial officer Robert Erni noted: “Q1 is not our busiest quarter, and gross profit and ebit in Q1 will be lower than Q4, due to seasonality, of course. Gross profit is an unknown variable, yet H1 17 was a bit weak, so we’ll likely do better.”
Air freight activity remains buoyant, and Panalpina is looking to capitalise on that front, both organically and inorganically.
Mr Karlen said: “Air freight: first of all it is about the volumes; we are seeing growing strong volumes driven by e-commerce developments and changes in consumer demand, and we believe the carriers will try to push up rates further, which we can adjust to. This is the right time to start negotiations and put in place new contracts.
“No more capacity is coming to the table, with the supply and demand gap widening. Rates will go up further. Ocean freight rates will be more stable, though.”
He continued: “Pressure is here to stay, annual contracts are being tendered and more customers are trying to re-tender, making sure they have more capacity available.”
The world’s seventh-largest forwarder by revenue also announced that bolt-on deals were on the agenda. So how about a $100m acquisition, for example?
Mr Erni was adamant that Panalpina had the firepower to help consolidate the industry at a faster pace than in the past, although controlling shareholders are inclined to take a conservative stance on extraordinary corporate activity.
“We would not have any problem to pay that much. However, it’s always difficult to motivate companies to sell and deal-making takes time,” he said. “But we are targeting bolt-on acquisitions in niche markets. Perishables are on our shortlist, but other niche markets are, too.”
Will Panalpina find a compromise between dividend yield and growth?
“Hopefully the payout is going to come down because the ebit is going to increase, but if we would spend $100m it would not impact our dividend policy in 2018/19.
“Return on capital employed is much higher than the yield we pay to investors, as you know, so a large deal would be a smart way to move forward. We are flexible about a lower payout for the right opportunity.”
The shares were under pressure until close of trading, down about 7% for the day, but management seemed unfazed.
“Today’s drop is not something we influence, analysts are adjusting their 2018 numbers, that is what it is.”
It is clear that, following a strong stock market rally that started in early 2016, some investors would want to trim their positions – also in light of news contained in the recent annual updates of other major forwarders.
“This could represent an opportunity too good to pass up for value hunters, if Panalpina gets its strategy right,”said one London-based portfolio manager, while another pointed out that, at these levels, “it could still be a sweet short trade.”
Against that view is the fact that the supply chain is ripe for consolidation.
“Carriers have improved their yields, therefore it is unlikely that we will see more consolidation in the short- to mid-term. However, I believe our industry will witness another wave of consolidation this year,” Mr Karlen said.
More broadly, last year’s numbers confirmed trailing trends for the third quarter, with record quarterly ebit/gross profit in the fourth quarter at 8.4%, which was in line with 8.6% in the third quarter. Net forwarding revenues rose 6.4%, but that growth was outpaced by forwarding expenses growth, determining a gross profit of Sfr1.39bn, down 1.8% on a comparable basis.
(See here my August 2017 estimates for annual gross profit, which is now at the lowest level since 2009.)
Personnel costs were on the up, at Sfr19.3m annually, but other operating expenses fell Sfr32.7m. Personnel costs and other operating expenses are not correlated, Mr Erni pointed out.
Adjusted ebitda fell 8.3% to Sfr146.2m, while operating cash flows plunged, down 39% to Sfr67.3m. Its investing cash flow – primarily represented by capital expenditures (cash outflows associated to the purchase of property, plant and equipment) – almost tripled to Sfr68.1m, yielding a negative free cash flow close to Sfr800,000, while cash outlays from financing reached almost Sfr90m.
As a result, cash and equivalents fell by Sfr89m, hovering at some Sfr310m for the year. Its net cash position gives it flexibility, but its shareholding structure could be a drag on value creation.
Much then, of course, will depend on the size and funding mix of its next deal.