Investeringskommentar, Michael Field, Analyst, 05/08/2016
DSV produced a solid quarter, reporting a slight beat on the revenue and gross profit lines. The main takeaway from the results for us, however, was the news that the integration of UTi into the larger entity is progressing ahead of schedule. While we welcome this positive update, we do not expect to make any material changes to our forecasts at this early stage. We retain our DKK 290 fair value estimate and conclude that the shares are fairly valued at this point in time.
Underlying net revenue fell slightly year over year as a result of the decline in average freight rates in air and sea freight; however, an improved gross margin compensated for this, rising to 23.8% from 21.6% in 2015. The company produced a strong performance in road freight despite difficult markets, with consignment growth of 5% year over year, driven primarily by market share gains. Lastly, in DSV Solutions, the company’s logistic and warehouse business, the benefits of the recent restructuring program are still coming through.
As detailed in our March 2016 initiation report, we believe that the operational performance of DSV’s underlying businesses over the next two years will be largely overshadowed by the speed and success at which the integration of UTi will occur. Management now expects to realise 40% of the total synergy estimate of DKK 1.5 billion in 2016, up from their previous 30% estimate. While this is certainly a positive omen, given the scale of the task at hand, we continue to model a relatively conservative outcome for the combined entity.
- DSV is now the fourth-largest third-party logistics provider in the world, handling 3% of global trade in a fragmented industry.
- The acquisition of UTi Worldwide gives DSV a significant footprint in geographies where its position had previously been subscale.
- The purchase of UTi was completed at a very attractive level. If DSV can turn this business around, then significant shareholder value can be created.
- The persistent supply glut among air and ocean cargo carriers adds significant volatility to DSV's buy and sell rates.
- Increased transparency in pricing in the industry has led to structurally declining margins across the board.
- The integration and restructuring of UTi Worldwide poses serious execution risk, given the company’s size relative to DSV.