1H16 recurring profit up 8% y-o-y; maiden contribution fromApex eroded by lower forwarding margins and associate profits
We expect forwarding margins to remain under pressure givenshipping sector consolidation; lower 2017-19e profits by 2-4%
Downgrade to Hold (from Buy) and cut TP to HKD12 (fromHKD12.6) after 18% y-t-d increase in the share price
Kerry Logistics’ (KLN) 1H17 recurring profit was HKD538m, up 8% y-o-y. Whileoperating profit was 12% higher y-o-y courtesy of maiden profit contribution (overHKD50m we estimate) from Apex, KLN’s US freight forwarding business (acquired inJune 2016). We attribute this slower profit growth to weaker freight forwarding margins(-1.1ppt y-o-y) due to higher ocean freight rates (shipping sector consolidation andalliances reshuffle) and a sharp decline in associate income from Chiwan ContainerTerminal. KLN announced an interim dividend of HKD8 cents which implies 24% pay-outand 1.4% annualised yield.
Takeaways from analyst briefing: Management said that 1Q17 was particularly weakalbeit demand stabilized in 2Q17. Management attributed consolidation in the shippingsector and ever larger alliances to decline in freight forwarding margin, a trend we think islikely to persist. KLN formed a JV in Indonesia to expand its regional express and willtarget to establish operations in Singapore next. Management expects the disposal of its15% stake in Asia Airfreight Terminal to be concluded by 3Q17 and reiterated itscommitment to divest non-core assets.
We lower our 2017-19e profit estimates by 2-4% to reflect lower forwarding marginsand associate income. Our revised estimates imply an 8% earnings CAGR in 2016-19e;11-20% below consensus. Although we note that consensus forecast may include gainfrom disposal of assets as recurring profit.
Downgrade to Hold (from Buy) and cut TP to HKD12.0 (from HKD12.6) after 18%y-t-d rally in the share price. We roll forward our valuation to 2018e EPS (from averageof 2017-18e EPS) and now value KLN at 17.4x PE which is based on its averageconsensus 12-month forward PE since 2014 (vs 18.6x previously based on peers marketweighted average 2017-18e PE). Our target multiple includes a 10% premium as weexclude other income (mainly disposal gains) from our recurring profit calculation whilesome consensus similar to the company may include these as part of their profits. Indeed,while the stock trades at 13.8x consensus 12-month forward PE, our estimates imply a17.4x 12-month forward PE. The stock has continued to de-rate since its IPO in 2013 andnow trades at 13.8x consensus 12-month forward PE vs over 16x prior to 2016 asearnings growth stuck around high single digits. With continued margin pressure in freightforwarding due to shipping consolidation and only high single-digit earnings CAGR in theforecast period, we see limited upside from current levels.