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Deutsche Post - Revenues tick up, but CV-19 means profits slump

Nicholas Hyett, Equity Analyst | 12 May 2020 | A A A
Deutsche Post - Revenues tick up, but CV-19 means profits slump

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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's first quarter revenue rose 0.9% to €15.5bn. However, the sale of the Chinese Supply Chain business, associated restructuring costs and coronavirus related headwinds meant operating profit fell 48.9% to €592m, while earnings per share fell 60% to $0.24.

Given the uncertainty around the coronavirus outbreak the group has withdrawn its guidance for the current financial year. However it still expects to achieve operating profits of €5.3bn in 2022.

The shares rose 2.6% 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. While marketing mailings have fallen as lockdowns grip the German economy, that's been more than offset by the surge in parcel deliveries thanks to retailers and shoppers turning to online alternatives.

But with domestic post and parcels accounting for just 30% of group profits last year, it's the global parcels and logistics business that really sets it apart. And the outlook here is far less rosy.

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.

A global footprint means 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. That's bad news 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 still has access to several billion in short term cash or debt funding. Analysts are currently forecasting a prospective yield of 3%, but given the group's exposure to the macroeconomic headwinds that should be treated with a healthy dose of caution.

Nonetheless, Deutsche Post should emerge from any economic downturn with its attractive market positions broadly unchanged. And while a PE ratio of 10.5 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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First Quarter Results

The Post & Parcels Germany division saw revenue rise 3.8% year-on-year to €4bn, with growth in both Post and domestic Parcels. Operating profits in the division rose 47.1% to €334m.

Post revenues of €2.1bn benefitted from higher prices and small increase in addressed mail, partially offset by declining marketing mail. Domestic parcel revenues rose 9.9% to €1.1bn, with 3.3% volume growth supported by increased prices. Cross border activity was subdued.

Revenue rose 4.5% to €4.2bn in the Express division, with strong growth in the premium 'Time Definite' products. However, increased coronavirus related costs meant operating profits fell 13.2% to €393m. The group saw some improvement in China towards the end of March, although Europe and North America were in the early stages of the outbreak at around the same time.

Global Forwarding, Freight saw revenues fall 4.1% in Q1 to €3.6bn, as declining ocean and air freight volumes hit results. The division saw some improvement from China towards the end of March, although volume downturns in Europe and North America only appeared towards the end of the period. Divisional operating profits fell 27.0% to €73m.

Supply Chain revenues fell 1.9% in the quarter to €3.2bn, with operating profits 78.4% lower at €105m. The disposal of the Chinese business and associated restructuring costs reduced operating profits by €484m without which operating profits would have improved despite the coronavirus disruption.

Ecommerce Solutions moved into the black during the year, with an operating profit of €6m on revenues of €996m - broadly flat year-on-year. The direct-to-consumer business benefited from increased coronavirus related activity, however that was unable to offset a heavy decline in business-to-business activity, particularly in Spain and India.

Free cash flow deteriorated year-on-year to -€409m, from -€256m last year. Net debt increased 5.2% compared to the same point last year and now stands at €14.1bn.

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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.

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