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Deutsche Post - parcel and freight strength deliver upgrades

Nicholas Hyett, Equity Analyst | 5 May 2021 | A A A
Deutsche Post - parcel and freight strength deliver upgrades

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Deutsche Post AG NPV

Sell: 51.52 | Buy: 51.52 | Change -0.38 (-0.73%)
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Deutsche Post reported a 22% increase in first quarter revenues, reaching EUR18.9bn. All the group's divisions reported growth, with particularly strong results in the Express parcel delivery, e-commerce and global freight businesses. Operating profit more than tripled to EUR1.9bn.

The group now expects full year operating profit of EUR6.7bn, versus previous expectations of EUR5.6bn, as the economy bounces back faster than initially expected. The group has also upgraded profit guidance for 2023 by around EUR1bn. The better than expected result is concentrated in the DHL parcel and freight divisions.

Deutsche Post shares rose 4.0% in early trading.

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Our View

Deutsche Post has a dominant position in the German postal market - delivering some 62% of all letters last year. That exposes it to the steady decline in global letter volumes, a trend that's been accelerated by coronavirus as marketing mail collapsed. Fortunately that's been more than offset by the surge in parcel deliveries, as German retailers and shoppers turn to online alternatives.

Deutsche Post is far more than a national postal service though, with domestic post and parcels accounting for just 33% of group profits last year. Instead it's the global parcels and logistics businesses that really sets it apart, and which is worth investors' attention.

DHL Express is the world's largest provider of premium, cross-border parcel and document delivery services, and its '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.

The group navigated the coronavirus crisis well. In particular it has benefited from improved pricing in air freight, as global capacity shrank but demand proved more robust. We doubt that will be sustained long term, especially once passenger planes get back into the air, but the underlying growth in parcel volumes may be a more enduring trend. International Time Definite volumes rose 26.3% in the first quarter of 2021, with domestic volumes up even more, rising 30.2%.

We also see the election of Joe Biden as US president as a positive for the group. A large portion of revenues rely on cross-border trade, and better relations between the US and its major trading partners would likely be a positive.

That exposure to global trade is a potential headache if the current healthcare crisis morphs into a more 'normal' economic downturn. But the group has weathered tough times before and has access to several billion in short term cash or debt funding. That should help it emerge from any economic downturn with attractive market positions broadly unchanged.

It's worth flagging though that the price to earnings ratio is currently some way above its long-term average. Given that earnings are probably higher at the moment thanks to coronavirus related tailwinds - that valuation looks even higher on a normalised basis.

Deutsche Post key facts

  • Price/Earnings ratio: 15.2
  • Prospective dividend yield (next 12 months): 3.2%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Results

The Express parcels division reported revenue growth of 32.5%, reaching EUR5.5bn. That reflects strong growth in both Domestic and International Time Definite deliveries, driven by strong volume growth and a modest increase in price. Operating profits rose 144.5% to EUR961m.

Sales in Global Forwarding and Freight rose 32.7% to EUR4.8bn. The division benefited from increased air and ocean freight volumes together with reduced supply - which provided a strong tailwind to prices. Operating profits more than doubled to EUR216m.

Supply Chain revenues rose 0.3% to EUR3.2bn, as growth in all regions was offset by currency headwinds. The Life Sciences & Healthcare, Consumer and Retail sectors accounted for the majority of new business in the quarter. Operating profits rose 59% to EUR167m.

Deutsche Posts ecommerce business saw sales rise 46% to EUR1.5bn, driven by very strong growth in all regions but particularly the Americas. Operating profits rose from EUR6m a year ago to EUR117m.

Post & Parcel Germany saw revenues rise 15.1% to EUR4.6bn, with operating profit up 66.5% to EUR556m. that was despite a 4.3% decline in letters revenue and reflects very strong growth in domestic parcel volumes.

Free cash flow in the quarter came in at EUR1.2bn, up from a EUR409m outflow a year ago. As a result net debt fell from EUR12.9bn to EUR11.8bn.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 for more information.