Analysis: Maersk – relationships matter and bad assets have nowhere to hide
Two things, of course, did not pass unnoticed on Friday when AP Møller-Maersk Group (APMM) ...
The guessing game over DSV’s next acquisition target has begun.
In an earnings call this morning, the ‘poster boy for freight forwarding’ announced strong results, but much of the focus was on its M&A plans.
With the integration of UTi now concluded, CEO Jens Bjørn Andersen said. “We won’t speak of UTi any more.”
But he added that DSV was stronger now than it was before it acquired UTi, and the initial dilution of margins has ended.
“M&A has proven to be the right recipe,” he said.
The results saw full-year 2017 ebit grow 43%, and was “Dkr4.9bn ($806m) better than we expected at the start of the year”. Net profit came in at Dkr3bn ($493m), up 79.5%, on revenues up Dkr74.9bn, up 10.6%
Air and Sea saw ebit growth of 53%, with gross profit up 5%: volumes in sea freight grew 6.4% against an estimated market average of 3-4%; while air tonnage grew 10.6% against 8-9% for the market.
“It is one of the best performances in the industry,” said Mr Andersen,”and we had extremely strong margins, with an operating margin of 9%.
“The margins were stable in an extremely volatile market,” he added. “It’s a strong foundation for future growth.”
Mr Andersen said DSV had “always been protective of yields – we need to make a profit when we grow. We haven’t diluted yields year-on-year, and we expect them to be stable going forward”.
He admitted there had been pressure on rates, particularly in air freight in the fourth quarter, but the company had withstood it.
“Some weeks, it was almost impossible to secure air freight. But it helped that we are one of the big guys.”
Road saw a 16% rise in ebit, while gross profit was up 4.5%.
“We weren’t happy about the fact that gross margins [16.1%] dipped below 17%,” said Mr Andersen, noting that there were capacity constraints in the market. “But we have discussed it with customers and instigated increases.”
But, he added, “we are happy with the state of the company and ready to meet our 2018 targets”.
CFO Jens Lund said over 15 years the CAGR was 17.6%. The question now is which firm DSV is going to buy.
“Our firepower is perhaps Dkr12bn ($1.97bn),” said Mr Lund. “We could buy a larger company than UTi without printing shares. If we did want to buy a larger company, we would hope that our shareholders would see the value – after UTi, our share price went up.”
But, he added: “We will try to finance a significant portion of what we are buying.”
The company spent about three times ebit on UTi and, while it would consider more, said Mr Lund, “if we take on too much risk we will have too much focus on the debt side, which might not be right for the shareholders. It would have to be a big company – but if it adds value, we would consider it”.
One of the difficulties in M&A this year, suggested one analyst, would be competition, especially following the US corporate tax windfall.
“On UTi, we were the only one looking, so there is probably not much appetite for large assets,” said Mr Andersen. “It’s more complicated, and [competitors] may not be able to scale to the magnitude we can. If they want to buy a company at a high price, they are welcome to do so – and we’ll find another.”
Suggesting the fragmented industry could use a little more consolidation, he added: “We will make sure that any acquisition is value-creating and accretive for shareholders.”
DSV also said it was not looking at any particular region.
“From a geographic point of view…we are looking globally, a company with a presence in many countries. Air and sea is still our preferred area to grow. It’s less troublesome and we have the infrastructure in IT to add more scale. And we see that the market is growing.
“But seldom you can buy a crystal clear air and sea company. It will be a bit of everything, like UTi.”
One other focus of growth, said the company, was through building customer relationships. DSV has implemented predictive analytics on customer behaviour.
“The analytics will create a warning signal to our operational staff. And when we see the client [we’ll be aware] there may be something to deal with and we will react sooner. The client will be happy and most likely stay with us.
“If we are successful, we may be able to grow a little faster – it’s too soon to be conclusive, but people are excited.”
He explained that for the 150 largest customers, DSV also had individual management and accounting plans, “so we can see how we develop relations, and that is a big part of our growth plans”.
DSV also noted the growth in e-commerce, which led last year to a particularly strong air freight market, and which would “continue to underpin it”.
DSV itself has 100 e-commerce customers, delivering a number of options for them, including pick-and-pack, inbound, warehousing and delivery.
“E-commerce will continue to drive growth momentum and opportunities.”