DSDVF - Here Is Why I Am Downgrading DSV A/S Stock

2023-12-18 14:45:54 ET

Summary

• DSV A/S, a logistics provider, has underperformed the market, losing 5.4% of its value while the S&P 500 gained 8.1%.
• The company has a strong track record of successful M&A integration and the ability to buy back stock, but there is no clear organic growth path at the moment.
• The DSV A/S Q3 2023 and 9M 2023 results show declining revenues and gross profit, driven by lower volumes and normalization of unit freight rates.

A few months ago, I started deepening my coverage with expansion towards logistics providers. While my primary field of expertise is not in logistics, it somewhat related to the aerospace industry, as commercial airplanes play a key role in logistics, and the aerospace supply chain health is also important to run aerospace companies efficiently. So, I have little doubt that logistics suppliers and specialist play an important role, even more so with e-commerce demand expected to grow further.

However, the reality is that investment in the logistics industry can be challenging, as the industry is now going through volume and pricing contraction as unit revenues continue to retreat from the highs seen during the pandemic. That is not to say that there is no value in stock of logistics specialists. An example is GXO Logistics ( GXO ), which saw its share price outperform since my buy rating in November, but underperform since the first time I covered the company. It shows that finding a good entry point is important.

In this report, I will be discussing the prospects of DSV A/S ( DSDVF , DSDVY ), which underperformed the market by losing 5.4% of its value while the S&P 500 (SP500) gained 8.1%

What I Like About DSV A/S

Before I briefly discuss the most recent results of DSV A/S, I want to highlight what I like about the company. One thing that I do like is that the company has been successful growing through M&A. The company has a strong track record in successfully integrating acquired company to generate value to the business. What I also like is that the company has the ability to buy back stock to counter some of the price and volume normalization we are seeing in the industry.

This also brings me to the point that I am liking a bit less, and that is that right now there is no clear organic growth path due to the price and volume normalization. So, an investment in DSV A/S for the near term is not necessarily a straightforward one despite long-term demand drivers.

Normalization In The Logistics Market Continues

The Q3 2023 and 9M 2023 results show very similar trends. Revenues are declining significantly, but due to margin expansion the gross profit decline is less but still significant. The decline is led by Air Freight, which is seeing 31.7% lower gross profit YoY for the quarter and a 26.3% decline for the first nine months of the year. Volumes have declined 14%, while gross profit per tonne has declined around 21%, driven by consumer behavior changes and a macroeconomic slowdown which is accelerating the rate normalization. Sea freight profit declined 23.3% for the quarter, driven by 4% lower volumes and a 20% constant currency softening in yields. Perhaps one of the few bright spots for Air & Sea Freight is that the rate of volume decline is tapering somewhat. The Road segment experienced a 10.9% decline in revenues, but gross profits declined by only 1.1%, driven by lower volumes and lower rates but better margins driven by the European network. The Solutions segment, which includes warehousing solutions, saw revenues decline 0.8%, but gross profit jumped 7.6%, with EBIT being flat driven by weak demand, but better gross margins due to the use of larger and more efficient warehouses.

Overall, the results show a 38% decline in revenues, gross profit being down 17% and adjusted EBIT down 28.2%. What we see is the reality of continued rate normalization in combination with lower volumes driven by macroeconomic uncertainty. Probably the only bright spots are that the rate of volume decline is improving, and gross margins have improved as well in a very challenging market.

Is DSV A/S Stock A Buy?

I previously had a buy rating on DSV A/S, and that was primarily based on strong M&A execution history. However, after filling in the balance sheet data and forward projections for DSV A/S into the evoX Stock Screener, we now get a Hold rating with around 34% upside. That is most definitely compelling, but it should be noted that this is mostly driven by the assumption of continued share repurchase practices which are financed with debt. Besides that, the company has an EV/EBITDA significantly above that of peers, and EBITDA is expected to decline further in 2024 and return to 2023 levels by 2025. Against the company median EV/EBITDA, there is significant upside, but I believe that macroeconomic weakness will continue pressuring DSV A/S. Until that weakness eases, I do not believe the upside will materialize.

Conclusion: DSV A/S Returns Value To Shareholders On Weak Market Momentum

I can’t deny that against the historical valuation of DSV A/S, there is compelling upside. However, the current environment is a tricky one for freight forwarders and logistics providers. A normalization of unit freight rates was already expected since the rates were just abnormally high due to the disruption in the transportation sector during the pandemic. However, we are currently also some additional headwinds, as macroeconomic weakness are adding to changes in consumer behavior leaving companies such as DSV A/S with lower unit rates and lower volumes. The margins are, however, improving and there is significant upside.

But given the uncertainties that pressure the DSV A/S stock price, I believe a Hold rating is more appropriate at this time. So, the investment opportunity is there, but I am more reserved on the stock in the current setting.

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