“Has Kuehne & Nagel got its mojo back?”

2021-07-15

“Throw me a frickin’ bone here. I’m the boss. I need the info.”
Dr. Evil – in Austin Powers.

3 years ago, I received a research update on the Kuehne freight forwarding Group from a fellow broker with the above suggestive title. I was intrigued and I thought: let’s check the deeper meaning of mojo, all the more because Kuehne is a core investment in the  Fund and we’ve held it since its launch.

A mojo is an amulet or talisman associated with hoodoo, an early African-American folk-magic belief system. A more general definition is a quality that attracts people to you and makes you successful and full of energy, a kind of magic touch. There you go.

As a cinema buff, you may remember the Austin Powers spy spoof comedy films, produced some 20 odd years ago. In one of those movies, Austin is on a quest to bring down his nemesis, Dr. Evil, who wants to take Austin’s secret “Powers”, his so-called mojo away from him, without ever succeeding. That’s when he triumphantly declares: “Who cares about SWAG, I’ve got my MOJO Baby, yeah!”

If you’re a music buff, you may remember the song “Got my Mojo Working”, written by Preston “Red” Foster, first recorded by Ann Cole in 1956, and popularized by Muddy Waters and Eric Clapton.  got my mojo muddy waters link (please!)

So, has Kuehne & Nagel got its mojo back? 3 years ago, the same analyst broker rated the stock as a hold recommendation. He argued the Group was experiencing some margin pressure and the M&A story was loosing some teeth. I argued back that most M&A deals are like losing wisdom (teeth!), like your dentist telling you: “Sorry your wisdom teeth are about to be painfully ripped from your gums and you’re paying a lot of money for it.” As for margin pressure, I was of the opinion that this was only temporary in nature, as turnover was growing double digits then. My take was that Kuehne had its MOJO and never lost it in the first place (just like Austin Powers!).On July 30th 2018, the stock was trading at CHF 155, and the enterprise value was CHF 18 bn.

Early this year, Kuehne+Nagel entered into a binding agreement to acquire Apex International Corporation (“Apex”), one of Asia’s leading freight forwarders, especially in the Trans-Pacific and Intra-Asia regions. The company was founded in China in 2001 and has expanded throughout Asia and beyond over the years of its growth history. With approximately 1,600 employees, Apex generates yearly turnover in excess of CHF 2.1 billion. In 2020, the company handled a total air-freight volume of approximately 750,000 tons and sea freight volume of 190,000 TEU. It adds up to a CHF 24 bn turnover for the Kuehne & Nagel Group, which includes 1,300 offices in over 100 countries and 76,000 employees. This doesn’t feel to me as though the Group is loosing its wisdom teeth. With the Apex acquisition, the Group will continue to provide innovative and fully integrated supply chain solutions and affirm its leading worldwide position in ocean freight, even though it is a fragmented market. On the theme of margin pressure, well their EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) will hit 9% this year vs. 6.6% in 2018, with a ROIC (Return On Invested Capital) cruising at a level second-to-none (more than 30%). Last but not least, the stock price has reached CHF 317, i.e. high tide, within the last 35 months.

As a shareholder, we are happy to be on board, and by the way, Austin Powers isn’t all wrong when he says: “Who cares about SWAG, when you’ve got mojo?”