"Professionals study logistics" - how one Danish company is moving the world

As the world’s supply chains get more complicated, a Danish company with a long history of 20% returns is carving a bigger space for itself.

Omar Bradley is the WW2 general who said: “Amateurs study strategy, professionals study logistics.” The theory is that logistics – providing the food, ammunition and fuel for your army - is as important as where and how you fight. When the Allies landed on the Normandy beaches in 1944 they took just weeks to build an underwater pipeline (PLUTO)¹ capable of moving a million barrels of oil a day.  

Logistics is similarly important in today’s vast, highly interconnected economy. How big is the global trade in goods? So big there are 17 million intermodal shipping containers on the cranes, ships and docks of the world. So big that managing the movement of those goods is a USD nine trillion industry.² 

For Platinum, the growth and increasing complexity in the logistics market made it a logical place to look for investment opportunities. That growth has three arms.

• E-commerce has exploded, driving the need for ever more goods sourced from ever-more places. According to a 2020 study from the United Nations Conference on Trade and Development, e-commerce sales reached $25.6 trillion in 2018. That’s 30% of global GDP.³

• With more reliance on imported goods, supply chain risk is growing. The pandemic shutdowns highlighted the costs and risks of over-reliance on single suppliers. As US economist Mark Levinson wrote, “To reduce the risk that goods won’t arrive on time, businesses are keeping more inventory, shipping via multiple routings and producing in multiple factories rather than in giant sole-source plants.” Logistics companies are the beneficiaries of that added risk, helping producers and shippers manage that complexity.

• Shifting geopolitics is also reshaping supply chains. As discussed in our recent article Reversing globalisation – will investors pay? Western economies have moved to ‘reshore’ and ‘friendshore’ manufacturing to reduce their reliance on China. That’s boosted economies like India, Vietnam and Mexico. And further added to logistical complexity.

In April 2024, Platinum bought into Danish logistics company DSV, believing it was attractively priced, a prime beneficiary of the forces mentioned above and had a future runway of growth.

Danes on the move

DSV started life in 1976 in Denmark when nine independent trucking companies united to form De Sammensluttede Vognmænd. From these humble beginnings, it has grown to become the 3rd largest global freight forwarder. Its share price has compounded at 20% per year for the past 20 years.⁴

What does DSV do? Simply put, they buy transportation capacity from carriers – such as shipping companies - and sell it to customers who have goods to ship. The customers of DSV include:
 

• Multi-nationals with global supply chains who use DSV to manage the complexity and risk in those supply chains.
• Smaller customers who use them to buy global transportation capacity at rates they normally couldn’t afford.
• Individual businesses who use DSV to buy logistics functions that would be too costly to execute themselves.

Crucially, DSV doesn’t just sell shipping ‘space’. They provide contract logistics: planning routes and organising shipments, managing shipping and customs requirements, arranging the transport of goods to and from ports/terminals or over the ‘last mile’ to the customer. In the year to July 2024, this solutions business was the fastest growing division in DSV, up over 12%.

DSV has achieved stellar growth – and rewarded shareholders over 20 years – thanks to its rare skill at buying up competitors in a fragmented industry.

They’re experts at rolling an acquisition onto their technology platform, cutting costs and winnowing out the weaker parts of the businesses they acquire. Importantly,  freight forwarding is a network business so there’s a virtuous cycle as you grow. By continuously acquiring freight forwarders over the past 20 years, DSV has expanded its geographic reach, grown the services it offers customers and, in the process, consistently expanded its margins

With their track record – an average ten-year return of 23%pa and 20%pa over 20 years – the market perceived DSV to be a high quality stock. The opportunity for Platinum came in 2023 when that perception changed sharply after a bout of management turnover, an ill-communicated Saudi Arabian Joint Venture and a strategic shift towards organic growth (growing the business through operational improvement rather than acquisition).

The market was also concerned that DSV was enjoying above average returns due to one-off, post Covid factors. Many in the market believed a fall in earnings – and share price - was in prospect. We took a different view, seeing DSV as a quality business that was mispriced and therefore had the potential to generate a significant return for Platinum investors.

Many ways to grow

DSV’s gross profit (the amount it receives from its customers for organising the shipment of their goods less the amount DSV pays to the carriers) is basically a sum of the mark-up on the rate charged by the carrier as well as a value-added component. During Covid both these components increased as freight rates increased and the market worried that there would be a likely normalisation to pre-Covid levels in the near future which would have an outsized negative impact on DSV’s earnings.

Yet in our analysis, the company’s 2019 acquisition of Panalpina had materially changed DSV’s service offering and customer mix in air and sea freight, rendering these pre-Covid comparisons misleading.  

Secondly, the share price response to the management changes was excessive. Over the past 12 months, DSV changed the Group CEO, CFO and COO as well as the head of the largest division, Air & Sea. Whilst this sounds negative, the new leaders are industry veterans with an average 23 years with DSV. The new CEO, Jens Lund, is the man who drove DSV’s highly successful acquisition and integration strategy.

CEO Lund had outlined an organic growth strategy focused on growing wallet-share from its top 50 customers. The market viewed this as a signal that more mergers and acquisitions were off the table.

We disagreed with this conclusion and liked the idea of DSV having multiple avenues to growth. We thought the management team would buy businesses if they met their hurdle – a 20% pre-tax Return on Invested Capital.

And buy they did

Late in the quarter our thesis was proved correct when DSV bought DB Schenker (DBS). DBS is the 4th largest freight forwarder in the world and is owned by the German government’s Deutsche Bahn. This transaction will be the largest in DSV’s history – it’s worth 14 billion Euros - and the combined entity will be the largest global forwarder with ~7% market share. If DSV management can take DBS’ margins up to its own levels, it implies 80-100 Danish Krone in earnings-per-share by 2028 and a total shareholder return in the mid-teens.

The irony is, whilst the DBS buy means the market’s focus is now on inorganic growth, DSV's maligned organic strategy is showing early signs of working, with successive quarters of volume growth in excess of the market. So when we look at DSV today we see a well-managed company executing operational improvement that’s also good at acquiring companies in an industry ripe for consolidation. That’s attractive.
 

• DSV is a holding in both the Platinum International Fund and the Platinum European Fund.

• If you are considering international shares as an investment option, speak to your financial adviser. You can find more information on Platinum’s distinct approach to global share investing here.