A Case Study of the DSV Group Based on Fundamental Analysis
Author:
Andreas Berger Hjortholt – M.Sc. (cand.merc.) Finance and Strategic Management (FSM)
Supervisor:
Christian Würtz, Falck Denmark A/S, Group Business Development
Master Thesis – Copenhagen Business School 2014 Submission Date: 13th of November 2014
Number of pages and Total Characters: 79 pages equal to 179.961 characters
Page 1 of 127 Abstract
This thesis is a case study of the Danish transport company DSV Group A/S and its main objective is to address the following research question: what is the theoretical stock price for DSV Group based on an in- depth strategic and financial analysis.
The freight forwarding industry is exposed to a number of issues. There is high market rivalry due to a fragmented market (from smaller domestic players to larger international competitors), governmental regulations, a customer universe that demands new product solutions, and constant negotiation of prices between the supplier (e.g. hauliers, shippers) and the customer.
In addition, it is also an industry affected by broad economic measures (gross domestic product) and impacted by oil prices, freight rates, and currency fluctuations. The challenges are growing with the increase in intermodal solutions and customers that demand a worldwide network, reflected by the globalisation that has created an increase in product flow from important trade lanes between Asia-Europe, Europe-North America and Asia-North America.
The high level of competition challenges the strategic agenda. The strategic path has to concentrate on a large range of parameters to distinguish itself from competitors, with specialisation in product type
(automotive vs. pharmaceutical), routes and delivery type (full-truck load vs. less-than-truck load), terminal placement and warehouse services (picking and packing for customers).
Another crucial factor is the ‘asset-light’ business model that is used among the international freight forwarders, helping to uphold operating margins in periods of volatility.
DSV have managed to obtain a strong market position through an attractive product mix combination (product type and routes etc.) in air and sea freight. The DSV’s profitability from transportation (gross- margin per tonne and TEU) and operating margins (EBIT and EBITDA) surpasses the representative peers.
In addition, DSV have managed to bring down fixed and variable costs year-to-year, which suggests that they pursue a costs leadership strategy in the core three divisions: road, air, and sea freight.
However, the constantly changing industry has challenged the DSV to focus on three growth strategies: market development, market penetration and product development, which is shifting year-to-year depending on whether an acquisition opportunity arises or if customers request new transportation solutions.
Broadly speaking, with no particular change in the product mix from the three core business divisions, the forecasts of revenue growth drivers (line-item approach) are based on the assessment of promising growth prospects from market and economic indicators and a strong strategic position in the market. The sales-driven approach was applied to the balance sheet items according to previous-years observations.
The costs of capital were applied together with the forecast predictions in the DCF models, which gave a theoretical stock price of 174,8 DKK as of 1st July 2014. Hence, the listed stock price of the DSV Group was overvalued according to the findings in this thesis.
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Table of Contents
Preface 4
0. Introduction 4
0.1 Methodology 6
0.1.1 Research Approach 6
0.1.2 Validity and Reliability 7
0.1.3 Delimitation 8
0.1.4 Case Selection 9
0.1.5 Financial Statement Approach 10
0.1.6 Reorganisation of Peers Financial Statements 11
0.1.7 Valuation Approach 12 0.1.8 Definition of Product Mix 13 Chapter I The Freight Forwarding Industry and DSV Group A/S: An Introduction 14
1. Introduction to Chapter One 14
1.1 Introduction to the Freight Forwarding Industry in Europe 14
1.1.1 Freight Forwarding in Europe 15
1.1.2 Strategic Approaches of Third Part Logistics 15
1.2 Presentation of DSV 18
1.2.1 Principal Activities 18
1.2.2 Corporate Strategy and Culture 19
Chapter II Financial Analysis of Freight Forwarders 21
2. Introduction to Chapter Two 21
2.1 Profitability Analysis - Group Level 21
2.2 Financial Leverage and Net Borrowing Cost 24
2.3 Growth Analysis – Trend and Common Size Analysis 24
2.4 Segmental Analysis of freight forwarders 27
2.4.1 Profitability of Air & Sea Freight 27
2.4.2 Profitability of Road Freight 28
2.4.3 Benchmark of Transport Volumes 29
2.4.4 Tranport Ratios in Air & Sea Freight 31
2.4.5 Estimation of Road Freight 34
Chapter III Market Analysis of the Transport Service Industry 38
3. Introduction to Chapter Three 38
3.1 Segmental Fraction of the Transport Service Industry 38
3.2 Development and Trends - European Transport Service Industry 38
3.3 Development and Trends - Road Freight in Europe 39
3.4 Development and Trends - Sea Freight in Europe 40
3.4.1 Development and Trends - Sea Freight in Asia-Pacific 40
3.4.2 Development and Trends - Sea Freight in United States 40
3.5 Development and Trends - Airfreight in Europe 41
3.5.1 Development and Trends - Airfreight in Asia-Pacific 41
3.5.2 Development and Trends - Airfreight in United States 42
3.6 Concluding Remarks 42
Chapter IV Environmental Analysis of the European Transportation Industry 43
4. Introduction to Chapter Four 43
4.1 Political and Legal Factors Analysis 43
4.1.1 United Nations Framework on Climate Change 43
4.2 Economic Analysis - Insights from Macro Data 44
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4.2.1 Europe 2020: Smart, Sustainable and inclusive Growth 47
4.2.2 Fuel Costs Impact on Freight Forwarders 47
4.3 Social and Cultural Analysis 47
4.3.1 Corporate Social Responsibility 47
4.4 Technological-Analysis 48
4.5 The PEST-Influence Model 49
Chapter V Strategic Analysis of DSV Group A/S 50
5. Introduction to Chapter Five 50
5.1 Ansoff’s Growth Model 50
5.1.1 Diagnosis of Market development 50
5.1.2 Diagnosis of Product Development 51
5.1.3 Diagnosis of Market Penetration 52
5.2 Porter's Generic Strategies 54
5.2.1 Diagnosis of Differentiation Strategy 54
5.2.2 Diagnosis of Cost Leadership Strategy 54
5.3 SWOT Analysis 58
Chapter VI Forecasting of DSV Group 59
6. Introduction to Chapter Six 59
6.1 Length of Forecast Period 59
6.2 Terminal Growth Rate 60
6.3 Inflation 60
6.4 Forecasting Assumptions – Transport Ratios 61
6.4.1 Revenue Growth - Airfreight 61
6.4.2 Revenue Growth - Sea freight 62
6.4.3 Revenue Growth - Road Freight 63
6.4.4 Forecasted Income Statement 64
6.4.5 Forecasted Balance Sheet 66
6.5 Budget Control - Group Level 68
Chapter VII Valuation of DSV Group 69
7. Introduction to Chapter Seven 69
7.1 Weighted Average Costs of Capital 69
7.1.1 Costs of Equity Capital 69
7.1.2 Risk Free Rate 70
7.1.3 Risk Premium 70
7.1.4 Estimation of Beta 71
7.1.5 Capital Asset Pricing Model Applied to DSV Group 72
7.1.6 Cost of Debt Capital 72
7.1.7 Weighted Average Costs of Capital for DSV Group 73
7.2 DCF Valuation 74
7.3 Sensitivity Analysis 76
7.4 Multiples 76
7.5 Conclusion 77
8.0 Bibliography 80
9.0 Appendix 86
Page 4 of 127 Preface
The aim of this thesis is to conduct a strategic and financial valuation of the Danish transport company DSV Group A/S – a public listed company with limited liability, which means that shareholders are not personally liable should the company become insolvent. My motivation for this choice is first and foremost due to the combination of the two main building blocks of my master studies: finance and strategy. A thesis based on a valuation makes it possible to use theories from both blocks and to apply them to a practical context. Myers (1984), among others, has debated how finance and strategy can mutually support each other’s shortcomings and create new standards and tools for managers in their decision-making. In order words, strategy can contribute to finance theory where the discounted cash flow model (DCF) enhances flexibility, as well as assisting in the forecasting of future values and growth.
0. Introduction
In advanced economies, the allocation of capital from investors provides the oil to the wheels of an entrepreneur’s project or a corporation’s engine to invest in a pool of net present value projects (NPV). A basic requirement from the investor is an acceptable and efficiently-managed return on their investment. In other words, the return from investments should equal or surpass the opportunity costs of capital (Weighted Average Cost of Capital - later referred to as WACC). However, capital markets have constraints in the form of both incentive problems and information asymmetries. From the perspective of private investors, in a publicly listed firm (which are often small and passive) the directors (CEO) may not always work in the best interests of the investors. Jensen and Meckling (1976) describe this relationship, in their analysis of property rights, as the conflict of interests between the shareholder (the principal) and the director (agent): ‘If both parties to the relationship are utility maximizers there is good reason to believe that the agent will not always act in the best interests of the principal’ (pp. 305). In light of this likelihood for self-interested behaviour, the contract between the agent and principal is as such incomplete, meaning that the contract cannot fully acknowledge the self-interested behaviour of the agent. To solve this issue, three steps (costs) are identified by Jensen and Meckling (1976): 1) monitoring costs of managers’ internal acts, 2) bonding costs of the agent to increase incentives, and 3) residual costs.
In relation to the conflict of interest between the agent and principal, Michael Jensen (1986) has offered an alternative approach to solving this issue for firms with large free cash flows. He argues that directors of modern corporations with large free cash flow, sometimes referred to as “cash cows”, have a tendency to hold too much capital inside the corporation and to invest these on negative NPV projects – such as unnecessary acquisitions diversified outside the core operations. To solve this conflict, Jensen (1986) recommends that the corporation increase debt (change of capital structure). For example, dividend payouts – which allow the shareholders to find other projects that exceed their opportunity costs of capital. However,
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Jensen (1986) claims that the increasing debt can function as a control mechanism for the agents. In other words, the debt secures the most efficient use of the invested capital.
Consequently, there is an information asymmetry between the top management and shareholders, meaning that the investor needs to consider carefully which firm to invest in. Akerlof (1970) introduced the concept of markets with asymmetric information, and was the first to demonstrate how a seller of a specific product can take advantage of information asymmetry to mislead the buyer by offering him products of bad quality at higher than average market prices, known by the market as “lemons” (inferior quality products). To supplement this logic with corporate valuations, the managers have inside information about the quality of the assets and future earnings that investors do not (Myers and Majluf, 1984). Hence, the investor can run the risk of not receiving a fair return on the investment if he or she invests in a low-quality firm. However, a corporate valuation can, to some extent, function as a tool to help investors reduce information asymmetries and, as such, select the best firm to invest in.
In light of the claims that asymmetric information and incentive issues are a concern in corporations and, moreover, that a corporate valuation can support investors in their decision making, this thesis will attempt to determine the theoretical fair value of one specific firm, namely DSV Group A/S. This has led to the following research question:
’What is the theoretical fair value of DSV Group A/S stock based on a fundamental valuation analysis, according to the listed price on OMX NASDAQ Copenhagen as per 01.07.2014?’
A framework of underlying sub-questions will contribute to answering the abovementioned research question:
- What is freight forwarding in a European context and which growth strategies are commonly used among freight forwarders? What are the advantages and disadvantages of these different growth strategies?
- How does the DSV Group perform financially-based time-series analyses (firms relative performance over time) and a cross-sectional analysis (comparison with selected peers)?
- What are the current market expectations for the freight industry and which environmental conditions influence the DSV Group?
- What growth strategy does the DSV pursue and which competitive advantages might appear within the Group?
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- How does the strategic and financial analysis influence the prospective analysis (forecast) and what impact does this have on the discount cash flow valuation approach?
- How sensitive are the valuation approaches to changes in key drivers based on previous analysis?
0.1 Methodology
0.1.1 Research Approach
The research method used in this thesis is based on a deductive case study framework since it explores existing theory applied to the DSV Group. A case study can be defined as a wide-ranging investigation of an individual, family, or organisation (White, 2000). This thesis tends to take a perspective of the whole organisation, looking firmly at the growth prospects of the DSV Group to set a theoretical fair value of the company. Yin (2009) defines a case study as an enquiry that uses multiple sources of evidence and that:
“Investigates a contemporary phenomenon within its real life context when the boundaries between phenomenon and context are not clearly evident” (pp. 13). Thus, case studies can use a number of methods such as interviews and surveys investigations, which include quantitative data from questionnaires. However, case studies should not be seen merely as a means of data collection or a design feature but instead as a comprehensive research strategy (Yin, 2003). An advantage of using the case study approach is the possibility to gain in-depth knowledge of an entire situation compared to if only one research technique is used i.e. interviews, surveys. As such, the case study approach facilitates answering the research question of this thesis by gaining in-depth knowledge of the DSV Group.
In the literature of case study theory Yin (2003) distinguishes between four designs for case studies: single, multiple, holistic or embedded. This thesis uses a holistic single case study approach. The rationale for selecting this type of case study reflects the research question itself. In other words, I believe that a holistic case study investigates the DSV Group in appropriate detail and quality. However, to enhance the quality and detail of the enquiry, sections of this thesis do also approach an embedded single case study. In other words, the DSV Group is investigated as a single case scenario while the business activities within the Group are emphasised separately to value the growth prospects of each. Furthermore, the financial analysis is organised in such a way that it represents a multiple holistic case study, where the DSV Group is investigated as a single entity, and the peers of the DSV Group are examined as other entities independently and then compared with the DSV Group. Hence, the cases (peers) are first analysed separately to find specific patterns, then a cross case analysis is assembled to generalise on the strategic change (product mix change) and attractiveness (profitability) of the competitors.
In addition, this thesis distinguishes between an exploratory and descriptive research framework; relying largely on the former. These two types of case studies are seen as complementary and work well together (Yin, 2003). An exploratory case study involves challenging the status quo by asking questions such as:
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‘what’, ‘how’ and ‘why’. In other words, it helps to shed new light on a particular phenomenon or offer new insights into a topic. The exploratory research method is used to gain new knowledge and insights about the DSV Group to assess the growth prospects of the firm. However, this thesis also includes certain descriptive elements, which investigate former research (Yin, 2003). For instance, the first chapter of this thesis is partly a descriptive analysis of the freight forwarding industry in Europe. However, the descriptive essentials will, among other things, function as an introduction to each chapter to create a solid foundation of knowledge before moving on to the exploratory part.
0.1.2 Validity and Reliability
The empirical information collected in this thesis draws upon secondary sources. The main objective was to gather extensive amounts of data and information from the DSV Group A/S and the peer group firms. This includes annual reports, articles from the most reliable newspapers, power point presentations, press releases, websites, Bloomberg terminal database, and so forth. Thus, all data and information is collected from secondary sources. Although interviews with leading employees who might be able to reveal strategic initiatives that would impact the forecast prospects – for example an ongoing acquisition – would have been exceptionally useful, unfortunately, in a public listed firm with fierce competition it is not possible to gain access to such insider information. Instead, the aim of this thesis is to build a strong analysis based on the secondary sources outlined above, which can reflect, as closely as possible, the prospects of DSV Group and other key factors. As for articles including interviews with the DSV Group director, one still has to be cautious about the reliability of his publically shared opinions about the Group’s future. Nevertheless, as such information is distributed to the shareholders it must be largely reliable, otherwise this could give rise to a conflict of interests between the partners.
A vital source includes the financial statements, which are considered reliable since they are produced under common laws and regulations. All the selected case firms are subject to the rules of ‘International Financial Reporting Standards’, known as IFRS.
Other types of material have been used and selected to uphold the reliability of the analysis; for example, economic reports from the IMF, World Bank and the European Commission, all of which are respected institutions. Furthermore, another major data institution, MarketLine, was chosen to set forth the future expectation of the market developments in air, sea, and road freight. However, economic and industry forecasts change continuously and cannot predict the future fully, but merely hint at how it may turn out. All judgemental forecasts are biased to some degree by the inherent unreliability of information collection of the judgement process (Stewart, 2001). This is referred to as ‘imperfect reliability’; i.e., humans are not consistent if a similar task is performed twice (Ibid). However, this lack of reliability cannot be solved. For
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instance, if another individual were to repeat the forecast the findings may vary from the first individual due to inattention, distraction or other factors (Ibid).
The forecasting in this thesis is based upon firmly reliable statistics, which combined are used to assess the future growth prospect of the DSV Group. In order to increase the reliability (repeating the case), the forecast assumptions are conducted with the following applied theoretical models: PEST framework, Du Pont model, Ansoff’s growth model, Porters generic strategies and SWOT analysis. These models are considered valid and are widely used in practice. However, the models may not be any more reliable or valid than the information and subjectivity used. As such, the DCF model is highly sensitive to any change in information. It has therefore been necessary to conduct a sensitivity analysis with change of key assumptions to secure the validity of the DCF model. Moreover, several checks have been implemented to enhance consistency including budget controls to ensure that historical rates such as return of invested capital (ROIC), profit margin (PM) and assets turnover (AT) are consistent with the historical levels. Moreover, since the majority of the forecasting items depend on revenue growth drivers, transport ratios are conducted for each business segment in the DSV Group, which can function as a control mechanism and enhance the accuracy of the forecasts.
0.1.3 Delimitation
It has been necessary to enforce an endpoint/terminal point in the research question since there is a likelihood that information used in this thesis will change. If such a point is not established it can be difficult to catch new information during the writing process, and this may furthermore change key assumptions. For instance, economic and market data institutions publish reports every quarter, or even sooner. In addition, the DSV Group publish earnings announcements, new information regarding new consolidations and so on, which can change previous assumptions.
Another significant limitation is the validity and reliability of the sources used in this thesis, mentioned above in section ‘0.1.2’, meaning that this case study relies solely on information from external publically available sources and not from external advisors or internal DSV Group decision makers.
The DSV group is divided into four business divisions: air, sea and road freight, and solutions. The latter business division is minor compared to the others in terms of historical earnings. Its function is, in addition, as a supplement to the others in terms of logistic solutions. The other principal divisions air, sea, and road freight will therefore be the main focus of the analysis. In other words, the division ‘Solutions’ will not be investigated in this thesis.
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The reader may furthermore notice that this thesis is constrained to explore the main markets in which DSV operates, namely Europe. This is because nearly all the activities of the road division are in Europe. Given this fact, the European market will occupy a main part of this thesis. However, growth prospects from other emerging markets are also considered since these have a growing impact and role within air & sea freight.
0.1.4 Case Selection
The cases (peer firms) are selected based on the universal character of this thesis:
1) Revenue has to be earned from the European continent in road freight. This decision is reasonable since the DSV Group have the principal market shares on the continent.
2) The selected peer cases must moreover operate within all the core business activities in which the DSV Group is represented, namely: road, air, & sea freight.
During the research process it was observed that representative peers in the industry do not disclose the accounting information required. An explanation for this is that many are subsidiaries of larger corporations.
The companies that fulfilled the requirements, and gave transparent information are Deutsche Post DHL, Kuehne + Nagel International AG, Panalpina Holding AG, and DB Schenker Logistics. The two freight forwarders Kuehne + Nagel and Panalpina are the main peers throughout this thesis.
0.1.4.1 Introduction of Peer Companies Deutsche Post DHL
Deutsche Post DHL is Europe’s leading mail and logistics service company with 435,520 employees worldwide. The integrated DHL is divided into four business divisions: express, mail, global forwarding, freight and supply chain. The global freight forwarding division is the largest of the four business divisions, equivalent to 27% of the aggregated revenue. The division is divided into air, sea, and road freight. The main geographical area DHL is present in is Europe, with 64% of the revenue (DHL, 13). The rest of the revenue earned comes from Asia and America.
Kuehne + Nagel International AG
Kuehne + Nagel Group is a global transportation and logistics company based in Schindellegi, Switzerland, but it was originally established in Bremen, Germany, in 1890. The Group has a long heritage in the industry for freight forwarding and has been expanding globally since the 1950s. Today, it has a worldwide presence with operations in 1,000 locations in over 100 countries. The Group is divided into six business units: air and sea freight, road and rail logistics, contract logistics, real estate and insurance brokers. Air and sea freight, and road and rail logistics represent 79% of the aggregated revenue.
Page 10 of 127 Panalpina Holding AG
Panalpina Group is a leading European freight forwarding and logistics provider with an international presence. The Group offers diversified services in air, sea and road freight where airfreight is the largest segment, equivalent to 45% of the aggregated revenue (Panalpina, 13). Their business activities are diversified across several key industries such as: automotives, healthcare, retail & fashion, hi-tech, telecom and oil & gas. Their contemporary vision is to grow in collaboration with their customers by creating tailor- made solutions. A large share of the Group’s activities are located in Europe with 59% of the aggregated revenue. The second and third largest geographic areas are America and Asia Pacific, based on revenue.
DB Schenker
DB Schenker logistics AG is a subsidiary to Deutsche Bahn AG, which owns several business activities. DB Schenker logistics will thus merely be described. According to DB Schenker, it has a solid foothold in the European market and a world leading position within air, sea and road freight. Their vision is to become a leading transport and logistics provider. The company’s strategy is called DB2020, which consists of three dimensions: The strategy is to become 1) a ‘profitable market leader’, 2) experience ‘profitable growth’ – also called ‘Go for Growth´ and 3) become a ‘leader in quality and service’ (DB Schenker, 13).
0.1.5 Financial Statement Approach
I believe that a brief discussion of the issue of ‘reorganising financial statements’ is necessary for the purposes of this thesis. During the research process it became clear that the valuation literature differs in terms of the classification of accounting items. It was a challenge to gain clarity about the consistency as the argumentation of the financial items, as well as the frameworks, can vary from book to book. Thus it was decided to choose one specific work, Petersen and Plenborg ‘Financial Statement Analysis’ (2012), first to avoid confusion and second to gain coherency.
In the book ‘værdiansættelse en praktisk tilgang’ by Ole Sørensen (2009), much effort is spent on explaining how to classify operations as core and non-core with the purpose of removing dirty surplus items that confuse operating and non-operating assets. The method is used to obtain value from core operations in the perspective of an equity shareholder (Sørensen, 2009).
Petersen and Plenborg have a somewhat a different framework. They look at which items have an effect on the invested capital, classifying these as interest-bearing and non-interest bearing items (operating items).
For example, if it is a non-interest bearing item it will reduce the invested capital (Petersen and Plenborg, 2012). The method of Koller, Geodhart & Wessels (2010) of reorganising accounting items is consistent
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with those of Petersen and Plenborg (2012) by separating operating, non-operating and sources of financing to calculate the invested capital.
Moreover, certain textbooks undertake a reformulation of the equity statement, especially Ole Sørensen (2009). In my experience, other textbooks in the field are less technical and hence do not discuss the significance of reformulation of the equity statements. In next section 0.1.6.1 ‘classification of accounting items’, the way minority interests are treated (either as debt or equity finance) is discussed. They are typically the items described in Ole Sørensen’s (2009) approach as ‘dirty surplus items’, unlike in Petersen and Plenborg (2012) and Koller, Geodhart & Wessels (2010).
From a holistic point of view Sørensen (2009), Petersen and Plenborg (2012) and Koller, Geodhart &
Wessels (2010) do make somewhat similar arguments. The effects of choosing one method over another have relatively little impact for the end valuation. The respective methods reformulate the financial statements to examine the value drivers in the company, namely the operational activities that are understood as value creators in the company. Separating them from financial items and non-operating assets will unlock the core value creating drivers of the firm.
0.1.6 Reorganisation of Peers Financial Statements
It is decided not to reorganise Deutsche Post DHL and DB Schenker’s financial statements as their business activities go beyond those of DSV, Kuehne + Nagel and Panalpina. For this reason they are not part of the Du Pont model on group level. Instead they are used as peers in the segmental analysis. The items from the balance sheets will be treated as equally as possible, but naturally there are some differences. All peer group companies follow the same accounting policies, i.e. the IFRS rules.
0.1.6.1 Classification of Accounting Items
Appendix B offers an in-depth explanation of the classifications of each item from the reorganisation of the balance sheet for the DSV Group:
Minority interests: Interpreted as part of equity capital, since they endure similar risk as debt according to Petersen and Plenborg (2012).
Cash and cash equivalent: Treated as excess cash, since it is stable over time. Consequently it constitutes an interest-bearing asset.
Assets held for sale (and liabilities related to assets held for sale): Assets held for sale are treated as cash e.g. considered interest bearing.
Other securities and receivable: Other securities available for sale can be sold within a one year period and are therefore treated as interest-bearing (DSV, 13)
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Investment in associates: Based on the DSV Group’s annual reports, associated companies seem to be involved in activities related to the core business. The associated companies can either support the large network or function as a springboard for a possible acquisition.
Pensions: Treated as interest-bearing debt. They are measured as value in use and as a financial expense in the income statement (discounted to present value).
Provisions: These follow a similar argument to the above explanation of pensions.
Operating leasing: Operating leases has been capitalised in a hypothetical balance sheet to demonstrate an ex-post and ex-ante situation of return on invested capital, in order to illuminate an accurate picture of the competitiveness among the cases (peer firms). Operating leases have not been accounted for in the forecast analysis, since they theoretically do not affect the intrinsic value of the DSV Group.
0.1.7 Valuation Approach 0.1.7.1 Present Value Approach
Professional advisers distinguish primarily between four types of valuations approaches, all categories under the present value method: the dividend model, the discounted cash flow model (DCF), the economic value added model (EVA) and the adjusted present value model. Among those, the models that are most applied among bankers and private equity companies are either EVA or DCF (Plenberg, Petersen & Holm, 2005).
These two models are in addition suggested by Koller, Goedhart and Wessels (2010) and Damodaran (2006) and are therefore used in this thesis. All the present value models are derived from the dividend discount model and are theoretically equivalent. This means they are based on identical inputs, which produce identical value estimates (Petersen and Plenborg, 2012). Both applied models have two stages, meaning that they are divided into two periods: an explicit forecast period (forecast horizon) complies with information from the applied theoretical models, revenue growth drivers and market analysis; and a terminal period reflecting the long-term growth rate in the industry (Ibid). There will not be any explanation for the mathematical backgrounds of the models in this thesis, but instead applied to the DSV Group. The models are as following:
Enterprise value0 = ∑ 𝐹𝐶𝐹𝐹𝑡
1+ 𝑊𝐴𝐶𝐶𝑡+𝑊𝐴𝐶𝐶−𝑔𝐹𝐶𝐹𝐹𝑛+1∗(1+𝑊𝐴𝐶𝐶)1 𝑛
𝑛𝑖=1
Where FCFFt measures the free cash flow to the firm in period t. WACC represents the weighted average costs of capital, which will be estimated and elaborated later in this thesis. The next model in line is the EVA model measuring the economic profit as (ROIC – WACC invested capitalt-1). The completed model follows below:
EVAt = Invested capital0 + 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙0+ ∑𝑛𝑡=11+ 𝑊𝐴𝐶𝐶𝐸𝑉𝐴𝑡 𝑡+𝑊𝐴𝐶𝐶−𝑔𝐸𝑉𝐴𝑛+1 ∗(1+𝑊𝐴𝐶𝐶)1 𝑛
´
Page 13 of 127 0.1.7.2 Relative Valuation Approaches
In addition to the net present value approach, relative valuation approaches (often referred to as multiples) are applied across the benchmark firms (peers) in order to compare the attractiveness of each firm in the industry and to triangulate the results from the DCF approach. In other words, multiples support the plausibility of the cash flow forecasts since the DCF model is only as accurate as the inputs it relies on (Koller, Goedhart and Wessels, 2010).
The advantage with multiples is, according to Petersen and Plenborg (2012), their speed and low complexity, however they can also become complex and time consuming, like the DCF approach. For example, if an EV/EBITDA multiple is applied it requires that the firms have identical expected growth rate (g), costs of capital (WACC), profitability (ROIC) and tax rate. In addition, it also requires identical accounting principles (IFRS standards against GAAP). As such, comparable firms can lead to time-consuming tasks.
Furthermore, the multiples are generally applied to companies in the same industries, which can help reduce the abovementioned shortcomings if they have identical economic characteristics and growth outlook. The multiple applied in this thesis is the EV/EBITDA since it explores the core operations in the firm and is commonly accepted in practice (Petersen and Plenborg, 2012).
0.1.8 Definition of Product Mix
In this thesis ‘product mix’ will be characterised and understood by the complete setup that a freight forwarder utilises in their daily operations. This includes, primarily, the following:
Product types: Industry specific solutions for the pharmaceutical or automotive industries, among others.
Transportation types (segments): full- or part-loads (container in sea freight), which distinguish in weight and load type where a full truck is normally oriented towards one customer, and part loads focus on several customers at once (Bain & Company, 2012). In other words, the frequencies of deliveries are distinguished.
Geographical routes: Distances distinguish, for example, Eastern Europe from Western Europe routes.
In the breakdown analysis of revenue growth in section 2.4 ‘Segmental Analysis of Freight Forwarders’ it is shown that a increase (or decrease) in revenue per unit is not necessarily due to an rise (or fall) in prices.
Revenue per unit is also influenced by change in product mix.
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Chapter I
The Freight Forwarding Industry and DSV Group A/S:
An Introduction
1. Introduction to Chapter One
This chapter explores the European freight forwarding industry by examining the size of the market, its operations and traditions; it also looks at the general business models. A definition of the term freight forwarding will be elaborated to ensure consistency. Furthermore, the strategic approaches, mergers and acquisitions, and respective advantages and disadvantages are discussed in relation to freight forwarders. In addition, this chapter will introduce the case study firm, the DSV Group, which will include a short description of the company’s principal activities and current strategic pillars, which are believed be responsible for the company’s strong foundations.
1.1 Introduction to the Freight Forwarding Industry in Europe
Despite the long existence within transportation of goods and services, the transport industry is still growing with an annual increase in demand for services. Currently, the transport service industry (including freight forwarding) employs approximately ten million people, equivalent to 4.5% of the total employment in Europe, representing 4.6% of gross domestic product (GDP) (European Commission, 2013). Among the different transportation options, in the internal markets of Europe road freight is the dominant transport type accounting for 44% and employing roughly five million people, generating close to 2% of GDP (European Commission, 2012).
Essentially, freighting is the transportation of goods from one destination to another. These goods could be, for example, raw materials, such as wood or iron, which are afterwards processed in a plant. The raw materials comprise consumer industrial products, carried on to the wholesalers, or distribution centres (Woxenius & Bärthel, 2008). This process often consists of one or more traffic modes, if more modes are used it is called an intermodal process (see Figure 1), which varies depending on the transport specifications.
It may either be domestic or foreign including overseas delivery. The chain of the transportation deliveries is separated into five stages: pre-haulage, transhipment, main haulage, transhipment and post-haulage (Savelsberg, 2007). Figure 1 shows an intermodal process.
Figure 1:
Source: Author’s own illustration, inspired by Savelsberg 2007
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The three terms: freight forwarders, third party logistics service providers (3PLs) and carriers will appear throughout this thesis. For simplicity the three expressions will function as synonyms since the larger corporations in the transport industry operate within all areas. From a review of the literature, a common definition is used instead, which matches the operating activities of DSV Group. The definition is as follows:
a freight forwarder functions as an ‘intermediary in the transaction between shippers and operators supplying physical transport and transhipment services’ (Woxenius & Bärthel, 2008 pp. 15). In other words, a freight forwarder services the corporation with physical transportation and administrative tasks of small or large consignments, documentation, warehousing and supplying both modal- and intermodal loading units (Woxenius & Bärthel, 2008). They organise the deliveries for shipping firms, hauliers or air charters but also directly with non-transport companies such as retailers or pharmaceutical companies. Freight forwarders do not own any assets such as ships, trucks or aircrafts. Instead, they lease the transport equipment by subcontracts. The leasing model is the dominant one and is known by the name asset-light (A-L). The A-L model creates agility in periods of high volatility with the possibility to maintain costs to the current activity e.g. hiring and firing people related to the activity (KPMG report, 2011).
The product mix offered by freight forwarders differs somewhat. The focus is either on differentiation (for example quality) – or cost focus strategies (for example economics of scale and scope). Specialisation in the field (either costs or quality) of freight can create competitive advantages. However, some can be specialised within product type: liquid bulk (gases, chemical products), solid bulk (agricultural and food products) and refrigerated transport (fresh food and pharmaceuticals) (Carbone & Stoner, 2005). In addition, the freight forwarders can specialise within transport type: full- and part-truck-, charter-, and container load, and moreover modal and intermodal transportation (the intermodal transportation between rail and road is a rising trend and is desired by more customers who want to diminish the emission of greenhouse gasses (Annual Reports, 13)). All the representative peers offer all types of transport within all geographic locations (Annual Reports, 13).
1.1.2 Strategic Approaches of Third-Party Logistics
Carbone and Stones (2005) examine European third-party logistics (3PLs) heterogeneity and strategic behaviour. Their research paper finds that acquisitions and logistics alliances are the strategic behaviour adopted among the 20 leading 3PL firms. These two types of strategic approaches have, since the 1990s, became well known as useful instruments to increase market power, penetrate into new markets or enhance a firm’s capabilities in the form of new synergies (Hagedoorn & Duysters, 2002). Managing the process of acquisitions and logistics alliances can create distinct advantages for freight forwarders. Consequently, acquisition and logistics alliances will be elaborated to gain an understanding of these two methods as they are applied in the industry.
Page 16 of 127 1.1.2.1 Acquisitions by 3PLs
Carbone and Stones (2005) have uncovered four factors that trigger 3PLs to make acquisitions: First, they benefit from a wider geographic coverage and control of important traffic routes, which allows freight forwarders to respond to customers’ increasing demand for global coverage. Second, it can create economies of scope, which can improve profit margins through business process optimisation and entry to new market segments. Third, the size of freight forwarders is important to withstand unexpected/expected investments in physical infrastructure (terminals, warehouses etc.). Finally, it can supplement synergies to the existing business model (Carbone & Stoner, 2005).
The size of the transaction market for the transport and logistics industry reached a value of 19bn dollars in 2013, equivalent to 27.4% growth from early 2012 (PwC statistics). Hence, 3PLs seems to favour acquisitions as a strategic path for growth. Nevertheless, it is not only in the industry for freight forwarding that acquisitions have become a commonly accepted method for growth. In 2013, acquisition transactions reached 646bn dollars in Europe, representing 10,943 deals. Figure 2 in Appendix C shows that the economic situation affects the acquisition negatively, where in 2007 Europe experienced an all time high revenue of 1.398bn dollars just ahead of the downturn caused by the financial crisis.
DSV Group has a remarkable track record with 36 completed transactions of companies since 1985 or 1.9 acquisitions (on average) per year. This means that DSV has used acquisitions as a strategic approach since its origin. The Group are acknowledged for acquiring firms with low asset valuation and redeploying them to achieve higher profitability by utilising their assets more efficiently – DSV optimise the acquired companies’
profit margin from 0 towards 4% (Zigler, 2013). For example, the Group focuses on small or medium sized family owned companies with growth potential. However, Family owned firms can be notoriously difficult to acquire and often need, among others, to be pressed on prices from fierce competitors. According to Lars Topholm (investment expert at Carnegie), small firms find it difficult to survive in a market where volume is necessary. In other words, the smaller family owned companies have practically no other choice than to sell their firm to a larger freight forwarder.
However, the acquisition process has causes and effects of its own, which have received lots of attention and curiosity from scholars (Barkema & Schijven, 2008). Studies have generally found that the firm did not increase in value, either in the short or long term (Haleblian et al., 2009). For example, Ravenscraft and Scherer (1987) have shown conclusive evidence on post-merger profitability. They define a successful merger by comparing product assortments ex-post (before the merger) with an estimate for what their
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performance would have been ex-ante (after the merger). The results following the merger show a declining operating income as a percentage of assets for the target group.
The adverse effects of acquisitions are numerous and can be challenging. Acquisitions demand an integration of resources such as knowledge and cultural differences. Today, the majority of the large consulting companies advise firms on how to most efficiently conquer the ex-post and ex-ante challenges of the acquisition process. Findings conclude that the initial stage of the process is crucial and many firms often underestimate the importance of getting the first months right. DSV has experienced such downside effects with its acquisitions. An example is the integration process of Frans Mass, in 2008, which turned out to be filled with unexpected issues related to IT-systems and terminals (Johnsen, 2008). The costs expected for the consolidation process had almost doubled from 250 DKKm to 450 DKKm (Beder, 2007). It took two years until the acquisition became profitable (Steen-Knudsen & Jensen, 2007).
1.1.3.1 Logistics Alliances
Logistics alliances is another strategic approach that is favoured among freight forwarders. The strategic alliances have evolved due to increased competition, higher demand for quality from customers and increasing costs. It is defined as when two or more firms agree to share resources to follow a common strategy. Co-operation between two firms brings together their mutual skills and knowledge, and can supplement new learning opportunities for the respective partners. A logistic alliance can involve vertical alliance with customers and horizontal alliance with other 3PLs (Carbone & Stoner, 2005).
The logistics alliances strategy was initiated by shipping companies outsourcing parts of their transportation and distribution functions, and started with a narrow range of activities to broader value-added services, including packing and supply chain integration (Bagchi & Virum, 1998). At presence, the vertical logistics alliances include contracts with, in particular, retailers, food retailing, and the automotive sector. 3PLs facilitates retailer’s international expansion. For example, if a larger retailer decides to go overseas a logistic alliance can support the retailer with the sufficient knowledge and skills needed to deliver the goods to the market.
Moreover, the strategic alliances can also be horizontal. This means that it connects two 3PLs skills and facilitates, in turn, the expansion into new markets by strengthening the geographical network. This can create costs efficiencies and lower risk exposure since it is shared together with an alliance partner. When expanding into new geographical areas, distance issues – including social, cultural, economic and political distance – are often overlooked and with an alliance partner these issues can be diminished (Chemawat,
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2001). The approach of horizontal alliances is especially favoured when the costs of developing new services and solutions are high (Carbone and Stones, 2005).
Besides, if the intention is to acquire a target firm, horizontal alliances can help gain valuable knowledge before bidding on the firm, meaning that a horizontal alliance is used as a stepping-stone to a full acquisition.
However, there are a number of shortcomings of entering into alliances: For example lack of knowledge transfer given the fact that knowledge is tacit - it cannot be spoken in words or written in sentences, but is rather in the hearts of the individuals (Nonaka, 1991). Furthermore, the partners can in a worst-case situation be protective and have self-interested behaviour. As a consequence the partners will unfortunately gain no new skills from the alliance. In addition cultural frictions can arise between the organisations and the connection between the partners will fail to build bridges between each other.
DSV Group utilises their expanision through logistics alliances in, for example, joint ventures (JV). For example, in late 2012 DSV acquired the rest of their stocks in DSV Latin America S.A. (DSV-GL) from their previous JV partner LOS INKAS S.A) (DSV, 12).
1.2 Presentation of DSV Group A/S
DSV Group A/S is a leading freight forwarding company from Denmark with an international presence, and it has a global network of hauliers, warehouses, subsidiaries, partners and associates in more than 75 countries. The Group is divided into three main business divisions: air & sea freight, road freight and solutions. The Group’s journey began in 1976 when ten independent hauliers founded DSV, originally known by the name ‘De Sammensluttede Vognmænd af 13-7 1976 A/S’ (the united hauliers). At the time, the DSV was ahead of its competitors in Scandinavia. The Group provided quick and inexpensive transport in road freight with a business model that functioned as a cartage department for independent haulers who received a fixed percentage of the freight price paid by the customers. DSV earned the differences between the charges on customers and the transport task by the hauliers (Hyltoft, 2014a). Modifications to the business model were made to increase efficiency. This means that DSV, at present, leases trucks, warehouses and freight terminals in Europe (DSV, 13). However, it was certainly not the vision of the Group to function only within national borders: the aim was to go global. In order to achieve this goal, acquisitions endorsed the entrance to and coverage of new markets. This is a strategic method which, even today, is common for freight forwarders’ growth agendas.
1.2.1 Principal Activities
The road freight division is the largest segment in the Group, equivalent to 47% of total sales in 2013. It offers full and part-full truckloads, model- and intermodal transport across Europe. In certain situations, the division provides services by rail and short sea crossings by ship. The division has high exposure to the
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European market with 42% in the Nordic countries, 12% in Southern countries and 46% in the rest of Europe.
DSV road employs approximately 10,000 people and has more than 200 terminals in Europe. The division is specialised within temperature-controlled transport (i.e. pharmaceutical industry), bulk transport, hazardous cargo transport, tank container services, customs clearance, terminal network and storage operations (DSV, 2013). In Appendix D, Figures 3 and 4 show the development in revenue and change year-to-year in percentage points, respectively.
The air and sea freight division organises transport of cargo around the world. The division is the second largest in the Group, representing 42% of total sales in 2013. The division is represented in 75 countries including associated partnerships, which support locations where the division is yet manifested with own operations to offer the customers a truly global network. The air and sea freight division have a different geographic exposure with 58% of total sales from Europe, 16% from America and 21% from Asia Pacific.
The division has approximately 6,300 employees worldwide and handles approximately 260,000 tonnes of airfreight and 770,000 TEU (twenty-foot equivalent unit) each year. Within sea freight the Group offers full- container-loads, and less-than-container-loads. In airfreight, it offers air charters of full planes, express and courier service. In Appendix D, Figures 5 and 6 show the development in revenue and volume in tonnes and TEU, respectively.
1.2.2 Corporate Strategy and Culture
DSV Group has neither a corporate vision nor mission in their strategic planning agenda. Instead, DSV follows an asset-light strategy, a decentralised organisation structure that represents a performance culture and a customer centric strategy to enhance and develop services.
1.2.2.1 Asset-light Strategy to Preserve Margins and Increase Productivity
The A-L model is an industry-wide strategic approach. The model is beneficial in industries exposed to volatility. It prevents capital from being tied up in assets, reduces fixed costs and raises the possibility to obtain a variable costs structure adjusting to the level of activity in the industry. As mentioned, the asset- light strategy is a common internal strength in the industry, at least all peer group companies advocate this strategy. Therefore, managing the A-L strategy can generate competitive advantages. For example, during the financial crisis the DSV managed to press new orders into the company without worrying about hiring new people, instead the employees had the ability to handle more movements. The result was an increase in productivity (Lunde, 2011).
1.2.2.2 Decentralised Organisation Structure and Management Culture
Another major pillar is the decentralised organisation structure purposed by the Group. It has proved to be beneficial for the organisation in terms of more agility to new requests from customers and integration of newly acquired companies. According to Jens Bjørn Andersen, the CEO, it creates freedom and an
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entrepreneurial spirit within the organisation (Hyltoft, 2014). In other words, the decentralised organisation structure facilities, among others, the integration of new acquisitions since the decision making in placed lower in the organisational hierarchy. An additional differentiation from the peer firms (centralised organisation structure) is the Group’s corporate culture. The Group has no particular values on paper that the employees can see, instead they have a performance culture that is built into the minds of the employees according to Jens Bjørn Andersen. The management style is results-driven and tough, which partly has led DSV to their current strong market position (Hyltoft, 2014). However, the contemporary organisational structure is under pressure since the DSV has increased in size. It demands a change to a more centralised organisation with a different culture according to Jens Bjørn Andersen (Juel, 2014b)
1.2.2.3 Strong Risk Management Profile and Customer Centric Strategy
The Group has subsidiaries in more than 75 countries and as such it is important to have a strong risk management department. DSV’s focus is on transparency and accuracy due to the risk of easily made mistakes, as both financial (frustration of currency and oil prices) and operational risks (IT-systems, legal issues) can occur (Juel, 2014). According to DSV this is a core motive in which they can achieve high profit margins. Besides a strong risk management setup, DSV promotes the importance of having a strategy that is oriented toward the customers’ needs. Therefore, continuous initiatives have been implemented to follow the trends in the market (DSV, 14).
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Chapter II
Financial Analysis of Freight Forwarders
2. Introduction to Chapter Two
This chapter examines the level of profitability and growth through a time-series and a cross-sectional analysis. The analysis will include a quantitative peer-group comparison with a sampling of representative freight forwarders, as introduced in section 0.1.4 ‘Case Selection’. The analysis is twofold, initiated with a top-down approach. First, the peer group firms are analysed on group-level and afterwards on segmental level of the three business units: air, sea and road freight. The findings of the following sections will contribute to the later analysis in Chapter five.
2.1 Profitability Analysis – Group Level
The profitability analysis is based on the Du Pont model, which measures the overall operating profitability, the return on equity (ROE) and its decomposed components (cf. Appendix F). The model is divided into three levels where each level explains the effects of the previous level. 1) ROE is explained by Return on Invested Capital (ROIC), Financial Leverage and Spread. 2) ROIC is explained by the revenue and expenses relation (Profit Margin) and Asset Turnover whereas 3) Profit Margin and Asset Turnover is explained by their underlying value drivers. This section will only explore profitability and growth on a group level.
Figure 9: ROE, Level 1 2010 2011 2012 2013
DSV Group (DK) 19.7% 24.4% 26.7% 27.0%
Kuehne + Nagel Group (CH) 23.2% 22.7% 20.1% 24.5%
Panalpina Group (CH) -2.8% 13.1% -8.5% 1.6%
Author’s own creation: red = worst, green = best
It is clear from Figure 8 that the development in ROE has stabilised prior to the crisis effects on the transport sector. DSV has since 2010 increased ROE gradually to new heights from 19.7 to 27% in 2013. Kuehne + Nagel’s ROE has during the period performed below DSV, with more fluctuations year-to-year. For example, ROE falls from 23.2% in 2010 to 20.7% in 2012. From 2012 to 2013 the development in ROE alters and reach new heights, representing 24.5%. In other words, both DSV and Kuehne + Nagel had a positive development in ROE since 2010. On the other hand, the third peer group participant, Panalpina had a negative ROE in 2010 and 2012, equivalent to 2.8- and 8.5%, respectively.
The second driver in the Du Pont model is ROIC. It shows how profitably a firm utilises its operations (Petersen and Plenborg, 2012). All else being equal, a higher ROIC will lead to higher company value. In order to assess whether ROIC is within an acceptable level it can be compared with WACC (Weighted Average Costs of Capital) or alternatively one can perform a cross-sectional analysis with representative peers (Ibid). The latter approach will appear throughout this chapter. As illuminated in Chapter one, operating leases fill a vast fraction of freight forwarders’ business models. DSV and Kuehne + Nagel has
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operating leasing equipment equivalent to 23.7- and 24.6% of total assets on average, respectively (cf.
Appendix E). According to Koller, Goedhart and Wessels (2010) and Sørensen (2009) it is crucial to make adjustments for operating leases since the item is not recorded on the balance sheet, it merely appears as a rental expense in the income statement. Hence, the freight forwarding companies gains an artificial boost in ROIC, but this do not affect the intrinsic value if it is incorporated accurately in the free cash flow, cost of capital (WACC) and debt according to Koller, Goedhart and Wessels (2010). Therefore, the ratios are only adjusted for leases to give a more accurate picture of the competitiveness in the industry. Three hypothetical balance sheets and income statements are conducted for DSV, Kuehne + Nagel- and Panalpina (cf. Appendix E).
Figure 10: ROIC, Level 1 2010 2011 2012 2013
DSV Group 11.4 % 13.0% 11.9% 13.2%
Kuehne + Nagel Group 30.9 % 28.7% 23.8% 32.5%
Panalpina Group -12.3% 24.3% -12.8% 2.9%
Author’s own creation: red = worst, green = best
Figure 10 illustrates ROIC before adjustments for operating leases. In the figure it is clear that Kuehne + Nagel’s ROIC surpasses both those of DSV and Panalpina during the period. With such a large difference in ROIC it is evident that especially DSV and Kuehne + Nagel follow different accounting policies with regards to the classification of operating leases. Kuehne + Nagel has double the size compared to DSV. In 2010, Kuehne + Nagel obtains a ROIC of 30.9% and even with certain fluctuations during the period they manage to achieve a ROIC equal to 32.5% in 2013. The unnaturally high ROIC is partially because of Kuehne + Nagel’s asset-light balance sheet. DSV Group does not have the same characteristics with a lower ROIC. For example, the ROIC is below ROE in all years during the period while the opposite scenario is seen at Kuehne + Nagel and Panalpina. In general, DSV ROIC shows a constant pattern through the historical period and tops at 13.2% in 2013 – a slight improvement.
Figure 11: ROIC, Adjusted for Leases 2010 2011 2012 2013
DSV Group 8.7% 9.7% 8.8% 9.6%
Kuehne + Nagel Group 15.4% 14.3% 12.0% 15.1%
Panalpina Group -4.2% 13.4% -3.6% 3.3%
Author’s own creation: red = worst, green = best
It is evident from Figure 11 that ROIC falls significantly when adjusting for operating leases. Compared with the non-adjusted ROIC, Kuehne + Nagel and Panalpina have changed the most after the adjustments of operating leases. In 2010, Kuehne + Nagel had an ROIC of 15.4% compared with 30.9 before adjustments – equivalent to almost half in all years. A similar pattern is observed for Panalpina. However, DSV has not been affected to the same degree as the competitors when adjusting for operating leases. In fact, ROIC has fallen by only three percentage points. For example in 2013, DSV has a ROIC of 9.6% while before the leasing adjustments the Group had a ROIC of 13.2%. The industry average for ROIC is 7.6%, which is below DSV – both before and after adjustments for leases (Sørensen, 2009).
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In order to better understand the development in ROE and ROIC, decomposition of its underlying drivers are conducted. The first driver, Profit Margin (PM), explains the development in ROIC by assessing the revenue and expenses relation. All things being equal, it is attractive with a high PM. The PM is calculated as NOPAT divided by revenue. Figure 12 below shows the PM for the DSV and the peers.
Figure 12: Profit Margin, Level 2 2010 2011 2012 2013
DSV Group 3.7% 4.0% 3.6% 3.9%
Kuehne + Nagel Group 3.6% 3.7% 2.8% 3.5%
Panalpina Group -0.9% 2.0% -1.0% 0.2%
Author’s own creation: red = worst, green = best
It is evidential from Figure 12 that the PM for all peers has followed a somewhat similar pattern as ROIC.
DSV Group has performed well compared to the peers, exceeding both Kuehne + Nagel and Panalpina during the period analysed. In 2011, DSV achieved the highest PM, equivalent to 4.0% whereas Kuehne + Nagel has 3.7%. Panalpina suffers the most with a negative PM in 2012, equivalent to -1.0%. However, since adjustment on leases changes the PM, it is decided not to describe and show these in the main text given that the effects are not significant (cf. Appendix F)
Figure 13: Asset Turnover, Level 2 2010 2011 2012 2013
DSV Group 3.1 3.2 3.3 3.4
Kuehne + Nagel Group 8.6 7.8 8.4 9.3
Panalpina Group 13.5 12.0 13.1 12.5
Author’s own creation: red = worst, green = best
In Figure 13 the Asset Turnover (AT) is illustrated and shows that DSV’s increase in ROIC is driven by a moderate PM and AT. The AT explains the utilisation of invested capital. During the period the Group has a considerably lower AT compared to the peers, which tops in 2013 with 3.4%. The development shows an improvement of invested capital since the AT increases slightly year-to-year. Panalpina’s high AT and low PM may explain the very high and low ROIC in the period. Kuehne + Nagel have accomplished a moderate PM and at the same time a very high AT, which has ensured their high ROIC during the period. However, this picture changes when adjusting for operating leases in the balance sheet, which diminish the high AT considerably.
Figure 14: Asset Turnover, Adjusted for Leases 2010 2011 2012 2013
DSV Group 2.1 2.2 2.2 2.2
Kuehne + Nagel Group 3.8 3.4 3.7 3.8
Panalpina Group 6.5 5.5 5.6 5.2
Author’s own creation: red = lowest, green = highest
As a result of the adjustments for operating leases, Kuehne + Nagel has cut their AT by more than half, as shown in Figure 14. The AT is 3.8 in 2013, whereas before adjustments it was 9.3. A similar pattern is seen for Panalpina which experiences a noticeable decrease in AT. In other words, the generation of invested capital diminishes significantly as a result of the adjustments. However, the DSV pattern is different from the peers with a smaller decrease in the AT and ROIC.
