Deutsche Post AG (DPW) NPV
HL comment (6 August 2019)
Second quarter revenues rose 3% to EUR15.5bn, with operating profits up 2.9% to EUR769m - slightly ahead of market expectations. That reflects some currency effects and strong performances from both the German Postal and International Freight divisions.
The shares rose 2.5% in early trading.
Deutsche Post's got a dominant position in the German postal market - delivering some 63% of all letters and 45% of parcels. But with the division accounting for just 20% 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 it's 'Time Definite' product has been outperforming the wider parcels business. Deutsche Post's other divisions provide additional parcel, freight brokerage and outsourced logistics services in hundreds of countries around the world.
A 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 a an economic slowdown can do. That makes recent warnings about a slowing global economy, particularly in Germany - which has been bordering on economic stagnation - a worry for investors. Worsening global trade relations are also contributing to lower freight volumes, and that's not good for a business which relies on cross-border trade for a large chunk of its revenues. With letters in long-term decline, the group can ill afford for parcels to take a turn for the worse as well.
That goes a long way towards explaining why the shares trade on a PE ratio of 11.8 times (a 9% discount to their 10 year average).
It's not all doom and gloom however. For now, revenues continue to climb, and Deutsche Post has weathered tough times before. Despite rising debt, the balance sheet doesn't look overstretched, and with the stock currently offering a prospective yield of 4.6%, 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. The added possibility of a modest re-rating on the cards, means we think there are worse homes for a long-term investor prepared to stomach some volatility.
Second Quarter Results
The German Post & Parcels business saw revenue rise 1.5% in the quarter, to EUR3.6bn, as growth in parcels more than offset weaker letter volumes and revenues. The strength in parcels reflects continued growth in e-commerce and price increases, while the continued shift of direct marketing online dented performance in letters. Quarterly operating profits of EUR177m increased 63.9% year-on-year, or 11.3% once restructuring costs incurred last year are excluded.
The Express business saw revenues rise 4.8% to EUR4.2bn, with operating profits up 0.8% to EUR521m. Growth continues to be driven by the higher end 'Time Definite' product line.
Deutsche Posts' Global Forwarding freight business saw revenues rise 2.5% to EUR3.8bn, with operating profits up 18.1% to EUR124m. That growth was despite a significant decline in volumes, and reflects a combination of mix and currency benefits.
Supply Chain revenues rose 1.2% to EUR3.3bn, with operating profits down 32% to EUR87m following restructuring costs. eCommerce Solutions saw revenue rise 6.2% to EUR995m, with losses in the quarter of EUR18m.
Free cash flow in the quarter fell to -EUR547m, reflecting a significant step up in capital expenditure in the Express division, particularly the renewal of the aircraft fleet. As a result net debt increased 18.3% to EUR14.6bn.
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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