1H16 recurring profit was down 2% y-o-y and in line with ourforecast; margins decline driven by logistics and warehouse
We expect sequential improvement in 2H16 and 2017 drivenby a low base and addition of US freight forwarding business
Maintain HKD12.2 TP which reflects our lower earnings offsetby increase in peers comparison valuation
1H16 recurring profit was HKD497m, down 2% y-o-y and in line with our forecast. Asexpected, Kerry Logistics’s (KLN) operating profit was impacted by currencydepreciation vs the USD in China, Taiwan, Thailand and India.Excluding the currency impact, profits would have been 4% higher. During 1H16, freightforwarding revenues and margins improved driven by strong demand in South andSouth East Asia, in particular India, Singapore and the Philippines. On the other hand,Logistics segment margins deteriorated on weak demand although it was able to offsetthe slowdown through new customer wins. Hong Kong warehousing was impacted bylower utilisation (93% versus near 100% previously). The company announced adividend of HKD10 cents per share, implying 1.5% annualised yield and 22% pay-out.
Business outlook: While the near-term environment remains challenging due to weakexport demand and economic slowdown, KLN management remains confident ofdelivering a better performance in 2H16. This optimism is driven by recent new customerwins and acquisitions which should drive profit growth during the 2H. In particular thecompany expects its freight forwarding business to grow faster vs the logistics segmentover the next 18 months driven by the completion of its acquisition of US freightforwarder APEX, one of the top three players in Asia to US trade route, in June 2016.
Expansion on track: Over the next 12 months KLN expects to add over 1.5m squarefeet of logistics facility. Additionally the group is looking to expand its regional expresscapabilities to Indonesia within this year. KLN also has increased its stake in its Indianlogistics JV – Indev Logistics – to 50% (from 30%) to tap in to the country’s stronggrowth potential.
We lower our 2016-18e earnings by 4-6% to reflect weak Hong Kong warehouse andlow integrated logistics margin. Our revised estimates imply a 5.5% CAGR in recurringearnings in 2016-17e and a sequential improvement in 2H16. In 2016e, we are now 5%below consensus on EBIT and 7% below on recurring earnings estimates.
Remain Hold with HKD12.2 TP which reflects our lower earnings forecast offset byincrease in its comparable peers multiple, and valuation roll forward to 2017e (from2016e). We now value the stock on 2017e PE of 18.2x (from 18.9x 2016e PE). At thecurrent price, KLN is trading at 16.5x FY17e PE and 1.1x PB with an ROE of 7% in2017e. We reiterate our Hold rating given the weak near-term outlook for its logistics andwarehouse operations due to the trade slowdown in China and intra-Asia.