DSV has laid the foundation for a decades-long collaboration with the Saudi state to build a logistics company to support the desert city of Neom.
”It is a joint venture that in principle can live indefinitely,” says DSV’s head of investor relations Flemming Ole Nielsen to WPO.
DSV’s first profits from the billion-dollar logistics project will come in six to seven years, he says.
It is a joint venture that in principle can live indefinitely
Flemming Ole Nielsen, head of investor relations, DSV
In its new annual report, the Danish freight forwarding group provides more details about the joint venture, which DSV jointly owns with the Saudi state and which the parties announced in October last year.
A collaboration that has led to a wave of critical questions for DSV from Danish and foreign investors and analysts.
Together with the state-owned company Neom, DSV will be responsible for logistics solutions in the mega city of Neom, which is currently under construction and is backed by the country’s Crown Prince Mohammed bin Salman.
Last spring, the Neom project was criticized by the UN human rights watchdog due to several critical issues, which has made DSV shareholders concerned.
The business is conducted in a joint venture owned 49% by DSV and 51% by the state-owned Neom company. The project includes the construction of logistics facilities, infrastructure and transportation and is expected to create 20,000 jobs.
The total gross investment will be USD 10bn.
However, DSV commits to a maximum investment of USD 2.45bn by 2031.
Aim is to build a viable company
According to DSV, the Danish-Saudi logistics cooperation in the city, which is being built in the northwestern region of Saudi Arabia and is the size of Belgium, will continue until 2055 and beyond.
Until 2041, the Neom joint venture will have 100% exclusivity and thus a monopoly on the provision of logistics services for the huge city project.
”We have agreed that in 2041, competition will be opened up for 25%, and in 2055 the exclusivity will cease completely and there will be free competition,” says Nielsen.
”But at that time (in 2055, ed.), the joint venture will be a significant logistics player in this market.”
Neom and DSV
The first years of the joint venture will be investment years for DSV, where the money goes out of the coffers before the cash flow turns around to generate earnings in the Danish logistics group.
DSV expects the investment in the Neom project to generate an annual return on invested capital (ROIC) of 20%. This means approximately DKK 3.5bn (USD 508m) every year.
”Of course, it will take a few years before we see a positive cash flow from the joint venture. But the expectation is that we will be able to collect the first dividend in six to seven years,” says Nielsen.
Major shareholder remains critical
As reported in WPO, there has been a lot of controversy about DSV’s Neom project.
Karsten Søndermølle, head of equities at Maj Invest, told WPO on Wednesday that he would have preferred if DSV had stayed out of the Saudi joint venture because of the high investment risk and because DSV’s reputation could be negatively affected, although the share manager admits that the Neom joint venture ”will be mega attractive from a financial point of view.”
We do not compromise on working conditions or human rights
Flemming Ole Nielsen, head of investor relations, DSV
”It is an opinion that he is allowed to have,” says Nielsen.
”We are going into this to make money, but also with very clear requirements for compliance with ESG criteria. Basically, we must be able to run this joint venture together with Neom, but according to DSV’s policies and code of conduct. We do not compromise on working conditions or human rights,” emphasizes DSV’s head of investor relations.
Maj Invest, which manages assets of DKK 85bn for private investors and pension funds, says it is confident that DSV can operate the Neom joint venture responsibly.
However, DSV’s reputation could be indirectly affected if there are critical incidents or human rights violations elsewhere in the large urban project.
”That part is something we have to deal with. But we’re not going to take responsibility for an entire country. We don’t do that anywhere in the world. However, it is our very clear impression from the conversations we have had with Neom that they also emphasize responsibility and want Neom to have a good reputation,” says Nielsen.
”They (Neom, ed.) need to attract people to live in the city and they need to attract labor.”
Permits soon in place
DSV presented its financial results for 2023 on Wednesday. Here, the acceleration of the succession in the company stole most of headlines.
Instead of a handover period of just over 12 months as originally announced, Jens Lund is already taking over as CEO from Jens Bjørn Andersen, who has led the company for 16 years.
On an investor call, Lund said that he expects the operational licenses for the Neom company to be in place by the second quarter of this year.
”After that, we will start putting the infrastructure in place so that we can gradually start the work. We are not yet fully up to date on what it will cost us this year, but the best estimate right now is between USD 200-250m,” said the new CEO.
