Freight Forwarders
Once PMI is on the turn, there's money to earn
Logistics & Freight
Damian BrewerAC
(44-20) 7325-7310
damian.brewer@jpmorgan.com
Andy Jones
(44-20) 7325-1622
andrew.r.jones@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 30 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Rating and value scenarios
DSV Pan’ K+N
PER 09E
Base 7.9x 9.3x 13.3x
Recession 13.1x 18.0x 21.2x
Historical av. 16.8x 18.9x 21.2x
EV/IC/RoIC/
WaCC 09E
Base 1.02x 0.55x 0.80x
Recession 1.63x 1.27x 0.97x
Historical av. 1.64x 1.02x 1.24x
Deterioration
priced-in
07 EBIT margin 5.3% 3.4% 4.0%
Margin attrition
‘priced in’ bpts
-140 -230 -60
09E Dividend yield 0.4% 5.6% 3.8%
Net debt/(cash)
EBITDA 09E
3.0x -1.4x -1.0x
Source: J.P. Morgan estimates Priced as at COB
27/01/2009. Pan’ = Panalpina. ‘Recession’ is as per
scenario detailed in this note
• We think Forwarder/Logistics shares could continue to perform poorly
as long as forward-looking PMI data is poor – which would suggest
continued weakness in trade demand expectations.
• Our analysis suggests a growing risk consensus earnings estimates will
need to be cut over H1-09 - as even the best-managed companies might
struggle to reduce costs as fast as potential gross profit pressures emerge.
There is a danger these shares under-perform as a 'false defensive'. We see a
risk of forwarder share over-shoot on the downside.
• Analysis in this note suggests a two-year recession scenario is already
heavily priced-in. The scenario could include large (up to 230 bpts) EBIT
margin reductions on shrinking revenues. Thus we think it probable that the
most likely level of consensus EPS downgrades are already ‘in’ forwarders’
share prices. In our view, the ‘optically’ low PER ratings (based on
consensus EPS forecasts) also suggest this.
• Thus we see EPS downgrade-driven weakness as an opportunistic entry
point. We think lagging cost-savings, market share gains and better
purchasing power (with transport capacity providers) could offset forwarder
revenue pressures and thus reduce some gross profit/unit risk. We see these
shares poised to perform when PMI data turn consistently positive –
even if BBG consensus estimates are still falling. We adjust DSV EPS to
reflect the recent DFDS investment and recent Nordic and UK GDP forecast
changes, reducing 09E EPS from Dkk7.60 to Dkk 7.01 per share.
• We see K+N offering a lower risk OW – with a recession scenario PER at
historical average and EV/IC/RoIC/WACC below 1.0, a net cash balance
sheet and (ex special dividends) 09E yield of 3.8%.
• However, we think DSV might offer greater upside over a 2-year period.
We think DSV requires not just PMI data to turn positive, but it also seems
to carry a capital structure (high debt leverage) discount. In a recovery, we
think debt should also serve to amplify equity returns. Overall, with scope to
surprise on (Euribor-driven) financing costs, and (faster, bigger) ABX
integration savings, we think DSV offers riskier, but potentially higher longterm
returns over K+N. However, with 0.45% dividend yield, return largely
rests on capital value appreciation.
• Panalpina (N) seems to have the harshest downside risk priced-in but
carries greatest secular risk to air forwarding profits. We see cyclical
declines over 09E-10E potentially being replaced by down-trading to sea
freight services as economies pick up. Over 09E, potential fines, and lack of
detail on its cost-saving could continue to weigh on the shares, but its 5.7%
dividend yield is better than DSV and K+N.

Table of Contents
Growth-orientated forwarding/logistics faces a different
operating dynamic....................................................................3
Readjusting ‘growth’ companies to profit containment during a recession .................3
Current market conditions: a sharp and rapid slow down in trade volumes underway3
Cargo trends continue to weaken.................................................................................3
PMI as a leading indicator points to further demand challenges..................................5
Demand contraction is likely to wash into Q3-09 – just due to year-on-year effects ..6
Market share gain potential for larger forwarders........................................................6
But adverse timing and mix effects likely....................................................................7
Potential gross profit (GP) per unit pressure risk as shipping rates fall .......................8
Other potential changes to the operating environment.................................................8
Staff costs represent the logistics’ main cost offset ...................................................10
The asset-light labour-heavy model saw EBIT margins fall in the early 90s – we see
at least as great a risk for 09E-10E ............................................................................11
PER trends look ‘optically cheap’ but the ‘real’ PER might become much higher ...11
Modelling a tougher downturn scenario than our base case ......................................12
What could be priced in? Setting EV/IC/RoIC/WaCC to 1.0 ....................................14
Forecasts downside risks but lack of visibility: so what? ..........................................15
As PMI troughs there might be upside - even as consensus EPS estimates fall.........16
Company earnings mix summaries ............................................................................19
DSV ...........................................................................................................................19
K+N ...........................................................................................................................19
Panalpina....................................................................................................................19
Net debt/(cash)/EBITDA...........................................................................................20
Shareholder base summary ........................................................................................20
Peer comparatives table .............................................................................................20
DSV..........................................................................................21
Kuehne & Nagel......................................................................23
Panalpina ................................................................................25