Road bumps. Opportunity intact. Why DSV‘s 14% sell-off looks overdone.

Research evidence excerpt

Road bumps. Opportunity intact. Why DSV‘s 14% sell-off looks overdone.

Idea

* = GAAP or approximated based on GAAP

** = Based on consensus methodologyMquestion is therefore whether the operational issues call either the Schenker synergy

e = Morgan Stanley Research estimates

case or the medium-term Road target into question.

Our view: the issues appear operational and temporary, rather than evidence of a

structurally weaker business. DSV incurred additional delivery and terminal costs to

protect service levels while integrating large physical and IT networks in Germany,

France and the Netherlands. Revenue resilience is encouraging, although the

underlying GP miss means Q2 cannot be described as commercially clean. More

importantly, Air & Sea has delivered a clear cost reduction, while Contract Logistics

has generated strong revenue growth with a broadly stable sequential cost base.

This demonstrates that DSV is realising productivity benefits elsewhere in the

Schenker integration. Road is likely the most complex division to integrate, given the

combination of physical networks, terminal footprints and IT migration. DSV expects

service levels and productivity to improve through Q3, although management was

clear that Q4 is the more meaningful test for underlying EBIT, conversion and

volume recovery. The 14% sell-off implies substantial read-across from Road to the

wider integration case. We think that is too punitive.

#2 Cash: temporary working-capital drag, not weaker structural conversion.

NWC increased to 3.5% of estimated FY revenue at the end of Q2, versus the

company’s normalised range of 2-3%. The Q2 working-capital outflow was

DKK5.7bn. A big pick up, absolute and vs. history. Investor incoming has focussed on