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Deutsche Post - good result from the core

Nicholas Hyett, Equity Analyst | 10 March 2020 | A A A
Deutsche Post - good result from the core

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Deutsche Post AG NPV

Sell: 40.69 | Buy: 40.71 | Change 0.14 (0.35%)
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Deutsche Post saw full year revenues rise 2.9% to €63.3bn. Combined with gains on the sale of the Chinese Supply Chain business and good cost control that helped reported operating profits up 30.6% to €4.1bn.

The board announced a dividend of €1.25 per share, up 8.7% year-on-year.

The shares rose 6.1% in early trading.

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Our view

Deutsche Post's got a dominant position in the German postal market - delivering some 62% of all letters and 40% of parcels. But with the division accounting for just 30% of group profits last year, it's the global parcels and logistics business that really sets it apart.

DHL Express is the world's largest provider of premium cross-border parcel and document delivery services, and its premium 'Time Definite' product has been a star performer in recent years. Deutsche Post's other divisions provide additional parcel, freight brokerage and outsourced logistics services in hundreds of countries around the world.

Its global footprint has meant Deutsche Post has been a major beneficiary of increasing global trade and outsized exposure to Germany, one of Europe's strongest economies, has also been a tailwind. Underlying all this is the continued growth in online shopping - which remains a key driver of parcel volumes.

However, you only need to look at the damage the last financial crisis did to revenues - down 14% in 2008 and 15% more in 2009 - to see what an economic slowdown can do.

Worsening trade relations and coronavirus related disruption to global supply chains are both weighing on global trade volumes and that's not good for a business which relies on cross-border trade for a large chunk of its revenues. An economic slowdown in Germany exaggerates the issue in the domestic market, where letters are in long-term decline.

It's not all doom and gloom however. Deutsche Post has weathered tough times before and despite rising debt, the balance sheet doesn't look overstretched. With the stock currently offering a prospective yield of 5.8%, investors should at least be paid to wait out any economic turbulence.

Deutsche Post should emerge from any economic downturn with its attractive market positions broadly unchanged. And while a PE ratio of 9.3 times is well below the long term average we think there are worse homes for investors prepared to stomach some volatility.

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Full Year Results

The core Post & Parcel Germany division posted a mixed result - with a strong parcels result offsetting a weaker performance in Post. As a whole divisional revenues rose 2.5% to €15.5bn. A poor result in Post reflects the continued substitution of electronic alternatives in marketing mail in particular. Operating profit in the division rose 80.1% to €1.2bn, largely because of non-recurring pension and restructuring expenses last year.

Express revenues rose 5.9% to €17.1bn, with growth across all regions, and operating profits up 4.2% to €2.0bn. Demand for the premium Time Definite delivery product remains strong. In Global Forwarding, Freight revenues rose 1% to €15.1bn, with operating profits up 17.9% at €521m thanks to improved cost control.

Revenues in Supply Chain rose 0.6% to €13.4bn despite the sale of the division's Chinese business and reflects a good result in the Americas. Gains on the disposal of the Chinese business meant divisional operating profit rose 75.4% to €912m, or 4.1% on an underlying basis. The small Ecommerce Solutions division saw revenues rise 5.5% to €4.0bn.

The group finished the year with net debt of €13.4bn, up 8.6% year-on-year. The group's gearing ratio increased slightly year-on-year.

The group expects operating profits to reach €5.0bn next year, with growth in both DHL and Post & Parcel Germany. This does not include any impact from coronavirus.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.