Market Insight: A rally by DSV, but is it hype or hope?
DSV’s interim numbers this month were nothing short of exceptional, but several risks could spoil ...
After discussing last week how much Flexport could be worth under three different scenarios for revenue growth, profitability and funding mix, I now find myself in the unenviable position of having to figure out, from the sketchy information the forwarder has sporadically shared, what it could mean for its air and sea freight activities?
According to one of its managers, in the fourth quarter Flexport handled much larger sea and air freight volumes – 18,100 teu and 8,250 tonnes, respectively – than in the prior year.
On this basis, a bear-case scenario could imply annual teu of 72,400 and tonnes of 33,000 for 2017. I initially thought these figures were generous, given typically slow first-quarter trends and other year-on-year comparisons across the industry, yet another manager earlier this year was quoted as saying that Flexport had handled 80,000 teu.
If true, that was a remarkable achievement, although to reach a level where its size is meaningful it would have to handle, in two growing markets, over 600,000 teu and at least 250,000 tonnes annually. Only then it would likely be included in the rankings for the top 20 forwarders globally.
All factors considered, I have assumed 80,000 teu of managed sea freight as a base-case scenario, with a bull case at 90,000 teu.
Drawing a comparison with two of the major freight forwarders that Flexport wants to challenge globally – Denmark’s DSV and Switzerland’s Kuehne + Nagel – it is likely, based on available details, that the disruptor is already operating as a much closer rival of the laggard, K+N, than the leader, DSV, in terms of pricing power.
Which means that a net revenue/teu ratio of $2,029 – this is DSV’s ratio in 2017 – is far too high for the services it offers. And, more likely, Flexport’s net revenue/teu stood at between $1,400 and $1,600 in 2017.
I could be very wrong here, of course, but the problem in assuming that DSV’s net revenue/teu applies to Flexport, is that its implied top line estimates in sea freight would be $147m, $162m and $182m, respectively, under my bear-, base- and bull-case scenarios. And, quite frankly, all three are way-too-high estimates, based on CEO Ryan Petersen’s disclosed group revenues for 2017.
“Flexport had $226m in revenue as audited by KPMG,” he said earlier this year, after projecting $500m of annual turnover last summer.
If we adopt K+N’s net revenue/teu ratio, Flexport sales would range between $111m and $137m, which could make much more sense, although turnover from sea freight activities could be lower still.
Of course, Flexport markets other services, such as customs brokerage (CB), which must be considered in the sales mix – yet before moving to these considerations, let’s explore its air freight volumes.
A normalised figure for tonnes handled last year could easily range between 33,000 and 40,000, which implies that DSV’s stellar revenue/tonne ratio should be immediately ruled out, again based on $226m revenue as disclosed by Mr Petersen. But K+N’s comparable revenue/tonne ratio – at about $2,600 – could apply, yielding annual revenues of $102m for Flexport’s air freight activities.
If we eventually trust a base-case scenario according to which Flexport handled 80,000 teu and 40,000 tonnes last year, its turnover comes in around Mr Petersen’s guidance at $225m in 2017, and that is also consistent with K+N’s net revenue/teu and net revenue/tonne ratios.
(If instead we had opted to go with DSV’s rates for both units, Flexport would have reported much higher net sales of $339m, which is unrealistic.)
There is one caveat, though, and my guesstimate could still be very wrong and, sadly for Flexport, overly bullish.
If the number for group revenues that Mr Petersen gave us is a) correct; b) refers to net revenues rather than gross revenues; and c) includes other group revenues…we surely must factor in customs brokerage sales.
CB sales adjustments
If we assume the CB business is responsible for only one-fifth of group revenues (rather than one-third, which is implied in Expeditors’ group/segment sales), it could well be that Flexport is already financially untenable based on revenues ratios, even before looking at key profit metrics, such as gross profit/teu.
Is it possible that its net revenue/teu and net revenue/tonne ratios could be about 20% lower than K+N’s comparable figures? Who knows: it’s aggressively targeting new market share, so the price lever is the only one to pull until it reaches critical mass, anyway, and then operating leverage might do the trick.
As far as these matters are concerned, hearing random numbers from different managers is the rule, unfortunately.
Implied in DSV’s last year’s reported numbers are a gross profit (GP)/teu ratio of $507 and a GP/tonne ratio of $1,061, while net revenues/teu and revenues/tonne are about $2,000 and $4,400, respectively.
K+N’s metrics are much lower across the board, but K+N is the largest freight forwarder worldwide by revenue, has scale, and capex is sunk into business, while Flexport, very possibly, is nowhere close to the top 300 in the global rankings.
It is possible that $20-$25m of gross profit was all it could get last year out of over $220m of sales, which means that it might need to raise between $35 and $70m every six months starting in the first quarter of next year, with the actual amount depending on capex and investment in other operating costs, for years to come.
Most numbers and anecdotal evidence confirm that the disruptor is likely burning tons of cash, but so what if can raise the funds it needs in time?
On the bright side, too, it is in good company.
Words and numbers
Mr Petersen told Forbes last summer that “shipping a 40ft ocean container might cost $2,000. Our competition will make 25% of that, on average. The rest gets paid to the owners of the trucks and the ships. Flexport keeps only 15%.”
When asked if Flexport could charge more, the boss said the company wanted to “be competitive on price and we want to be high-value”.
He added: “Our competitors are bigger and they’re able to pay a lower rate to the shipowner. We shipped 7,000 containers this month. Our competition might ship 100,000 containers or more. The biggest are shipping several million containers a year.
“Since we’re more automated, we make the same profit they do, or more.”
Wishful thinking, perhaps. Either way, we’ll find out by Christmas.