In a long-running theme since COVID-19 hit, logistics company earnings continue to outperform globally, and DSV Panalpina (OTCPK:DSDVY) was no exception.
Summary
DSV Panalpina raises guidance again heading into peak season for sea and air freight.
With management embedding some conservatism despite sea rates remaining elevated a month into FQ3 '21, I see potential for an upside surprise.
Coupled with medium to longer-term capital allocation upside, I am upbeat on the DSV outlook.
Furthermore, with DSV raising guidance again heading into peak season for sea and air freight, it seems highly likely that freight rates and forwarder yields will remain elevated in the second half of the year as well. While there are risks to the current pricing trends as COVID-19 restrictions eventually lift, DSV should still benefit from the realization of M&A-related synergies, which could prove critical in cushioning earnings in fiscal 2022 and beyond.
As DSV's organic growth tends to accelerate towards the end of larger integration processes as well, I see the Panalpina integration leading to upside surprises ahead. And with DSV shares trading on a reasonable c. 33x P/E multiple, I am upbeat on the outlook.
Favorable Rate Backdrop Continues to Boost Quarterly Results
The headline FQ2 '21 results were very strong at first glance and expectedly so, with EBIT beating consensus estimates at +37% Y/Y on the back of higher unit margins in both Air and Sea, partially offset by lower volumes. Unsurprisingly, conversion rates in Air and Sea were also strong - as confirmed by Kuehne+Nagel's ((OTCPK:KHNGF)) earnings release as well, forwarders seem to be able to pass on higher rates and, as a result, attain higher yields.
I would highlight, however, that on a Q/Q basis, DSV's Air and Sea EBIT growth was behind Kuehne's c. 27% increase (excluding APEX), mainly reflecting a more robust sequential unit margin progression at K+N. Cash flow was another weak point, with FCF for the half-year declining Y/Y, mainly due to a significant working capital-related outflow during the period, including c. DKK 900 million relating to a property development divestment and the remaining outflow driven by business mix. Nonetheless, the company still has a solid balance sheet and remains on track for its buyback program, which is scheduled to run up to end-October 2021.
Conservative Guidance Leaves Room for Another Beat and Raise
On the back of the FQ2 '21 strength, DSV has raised guidance again and now sees EBIT in the DKK12.5-13.0 billion range (up from DKK11.75-DKK12.5 billion previously). However, I suspect there might be some conservatism embedded in the guide, considering the confluence of tailwinds, including the current freight environment, the strong Road performance, and the projected pick-up from Solutions. Additionally, management commentary also noted that the guidance is built on the assumption that rates in air and sea would be lower in the second half to account for any unexpected decline in yields. Yet, with sea rates remaining elevated a month into FQ3 '21, DSV appears on track to come in ahead of near-term guidance.
Furthermore, management also acknowledged that supply constraints, especially in sea freight, could continue into fiscal 2022. This scenario would imply upside to consensus estimates for the upcoming year – per DSV, contracts with liners are divided equally between spot and longer-term, and therefore, contract rates continue to be successfully passed on. On the other hand, should a decline in Sea unit margins extend into the upcoming years (as DSV's guidance assumes in H2' 21), this would likely be more negative for K+N considering its mix. As such, I see DSV as a safer vehicle to navigate uncertainties ahead, although with sea freight rates still rising, I am upbeat.
Incremental M&A and Capital Allocation Upside
The latest buyback announcement was largely in line with expectations - DSV has long had a policy of returning excess cash to shareholders, and with the prior program expiring into the print, the move made sense. Management commentary indicates there will likely be more on the way, signaling another buyback post-FQ3 '21 of a "couple of billion." While DSV will have to balance the capital return against further working capital outflows for the rest of the fiscal year, the increasing volume intensity in the current environment should be supportive of these plans. As such, I see room for a total sub-DKK 20 billion buyback for the whole year (relative to the c. DKK 14-15 billion already announced).
Looking ahead, DSV also plans to hold an EGM ("Extraordinary General Meeting") in FQ3 '21 for the approval of a member of Agility to the Board (related to the recent GIL ("Agility Global Integrated Logistics") deal) and to request a c. 20% share issue authorization, which should pave the way for further M&A ahead. In the meantime, DSV's acquisition of GIL marks another step on the longer-term M&A journey - post-GIL transaction, DSV is poised to become the third-largest global third-party logistics player by revenue. In the meantime, the prospect of more accretive bolt-ons and DSV's track record with regard to post-M&A integrations should continue to brighten the earnings outlook as well.
Final Take
Overall, it was another strong quarter for DSV, with the current favorable conditions for freight forwarders certainly providing a nice boost. As things stand, trading looks set to remain at similarly strong levels (if not even higher) for the remainder of fiscal 2021, and therefore, I view guidance as conservative. Beyond the upcoming quarter, I expect unit margins to normalize eventually, but there could still be room for medium to longer-term upside pending details on the capital allocation front – this includes the GIL acquisition (expected to close this quarter) and further M&A, along with share repurchases.
Comments