Kerry Logistics Network 1H14 earnings plunge 29.8% YoY

The company posted healthy, albeit unexciting, results.

In 1H14, Kerry Logistics Network's earnings went down 29.8% YoY due to lower gain from fair value change of investment properties.

According to a research note from Maybank Kim Eng, meanwhile, overall revenue increased 4.9% YoY to HKD9.98b, with operating profit (before fair value change of investment properties) up 12.9%.

Interim DPS of HKD0.06 was declared, which represents a core payout of 20%. By division, segment profit from integrated logistics, comprising logistics operations and Hong Kong warehouses, increased 14% YoY.

However, the report noted that this is offset by a slower 8% YoY growth in international freight forwarding.

Here’s more from Maybank Kim Eng:

Operating margin expanded 0.6ppt to 8.1%, thanks to across-the-board margin improvement: logistics operations (+0.6ppt), HK warehouses (+1.8ppt) and international freight forwarding (+0.2ppt).

Associate contribution was weaker, however, dropping 37.9% YoY, which partly offset the growth in the other businesses. KLN’s 1H14 results reaffirm our view that core earnings will be slow in FY14.

We upgrade FY14-16 reported earnings forecasts by 7.3%/6.7%/6.5% to factor in higher-than-expected gain from fair value change of investment properties, but made minimal changes to core earnings forecasts (-0.4%/-0.2%/0.2%).

We expect a 10.9% three-year earnings CAGR. The stock now trades at a PER (core earnings) of 22.3x for FY14 and 20x for FY15, still at the high end of the peer range, which we think has well-reflected its strong presence in Asia and better margin performance.

We expect M&A contribution will still be small and HK warehouse growth will remain slow, hence we see valuation as fair and our TP, based on 12-month forward SOTP, remains unchanged at HKD12.80.