Investors were keen to understand the drivers behind apotential rebound in profits in 2017e after a challenging 2016
Management reiterated its plan to dispose its non-core asset inorder to improve ROE; this could also potentially lift dividends
We rate KLN Buy with an HKD12.60 TP; the stock offers 2.7%yield in 2017e with 10% earnings CAGR in 2016-19e
Below we outline the key highlights of investor meetings held by the management teamof Kerry Logistics Network (KLN) on 28-29 March 2017.Discussions centred on the potential recovery in 2017 after a challenging 2016:Indeed, KLN’s 2016 results were impacted by several one-offs including fewer workingdays in Taiwan due to typhoon and holidays, lower seaborne sugar exports in Thailandas sugar was exported by truck to Myanmar and then re-exported to China anddemonetization in India since November 2016. KLN believes that all these one-offsshould set a low base for recovery in 2017e.
Earnings set to rebound in 2017e. Management noted that logistics volume growth inthe y-t-d has been strong in South East Asia as sugar exports rebound in Thailand.Indeed, China has begun a crackdown on illegal sugar imports from Myanmar (source:Myanmar Times, 28 October 2016). Taiwan should also normalise from March 2017. Infreight forwarding, transpacific continued to do well while Asia-Europe was still weak,albeit back haul was strong. Maiden full year contribution from Apex (US freightforwarder) should also drive profits. KLN also expects to conclude by May 2017 theacquisition of a freight forwarder with a presence in nine CIS countries.
Medium term outlook: Management reiterated that the movement of factories fromChina to Vietnam and India, especially in electronics, will still require imports ofcomponents and therefore drive intra-Asia volume growth. KLN has also started railtransport in China-Europe, although on ad-hoc basis and with government subsidies. Itguided that scheduled services could make this service competitive. KLN reiterated itsplan to divest its non-core assets (c10% of assets) over the next five years to improveROE and this could also lift dividends. Indeed, KLN guided earlier that it will distributeas dividend the profits from the sale of its 15% stake in Asia Airfreight Terminal.However FX will continue to remain a drag. Management believes that strong USDvs RMB will continue to drag the earnings of its China operations. Indeed, HSBC FXstrategists forecast the RMB to decline on average 5% y-o-y vs. USD in 2017e.
Maintain estimates, Buy rating and HKD12.6 TP. We continue to base our valuationon the average of 2017-18e EPS and continue to value KLN with at 18.6x PE based ona market cap weighted average PE of comparable peers. With 13.3% upside, wemaintain our Buy rating on KLN given recent share price underperformance and ourexpectations of a strong rebound in earnings in 2017e.