UBS: Kerry Logistics Network – Not as bad as feared

30/07/2020

Investment bank UBS writes today that “Kerry Logistics Network delivered a better-than-expected guidance on H1 20”.

It told investors that “we were overly bearish on the impact of COVID-19 on Kerry Logistics Network (KLN)’s H1 20 results. We thought the company would suffer from an earnings decline but the latest guidance suggested a double-digit growth excluding the loss of revenues from two of its nine Hong Kong warehouses divested in June 2019. As a result, we lift our FY 20E reported core net profit to almost flat YoY.”

IFF and IL strong yet HK warehouse weaker: The sharp increase in demand for consumer staples shipment has pushed up its International Freight Forwarding (IFF) revenue and margin. As a result, we raise our FY20E IFF operating profit by 25% leading to a significant lift in net profit. The lockdown has supported its domestic express business in countries such as Thailand, leading to better-than-our-expected Integrated Logistics (IL) segmental performance. HK warehouse business has shrunk in-line with the economy. China remains a weaker spot for KLN as it focuses on domestic recovery post-COVID-19 rather than import/export where KLN is exposed to.

Low visibility on H2 20 outlook and assets disposal: Management views the outlook being uncertain, while we conservatively forecast a YoY decline in H2 20. The recent development of the pandemic in Hong Kong will further affect the local IL and HK warehouse businesses. Slot constraint on air freight is gradually easing leaving less room for KLN to grow its IFF on rush order. In terms of further assets disposal, a potential catalyst, we do not expect any progress this year as we believe a priority for the company is to manage the downside risks on earnings and receivables as its customers could run into problems.

Valuation: Maintain HK$15.00 price target and Buy rating: Over time, we believe consensus will focus on KLN’s potential to unlock value instead of short-term earnings volatility. Our price target is based on a SOTP valuation, which includes KLN’s HK warehouses based on comparable transaction prices, Kerry Thai Express on 35x trailing PE, Kerry TJ on market value, and the remaining IL/IFF businesses on peer EV/EBITDA multiples.

The share prices rose 5.2% to HK$12.56 on Thursday. Its 52-week high is HK$13.74.