Deutsche Post AG, headquartered in Germany and operating under the trade name Deutsche Post DHL, is the world’s largest courier company. The Group is made up of four divisions being; The Post - eCommerce - Parcel (PeP), Express, Global Forwarding and the Supply Chain divisions.
The shares of Deutsche Post AG trade on the Xetra stock exchange and have increased by circa 7% year-to-date. The shares are also trading on an attractive indicative gross yield of 3%.
The main reason why the shares have underperformed the market (DAX index) is because the restructuring program of its freight division is taking longer than expected and management announced that it expects the division to return to profit in 2016. This delay led to a reduction in managements 2015 profit targets.
However, I continue to believe that this company still has a lot of give and investor should look beyond short term setbacks especially when they are due to improvements in the way things are done to increase efficiency in the future.
The following are reasons why I think Deutsche post should continue generating positive returns to shareholders:
Revenues are expected to continue to increase
I expect the revenues of the Company to increase substantially in 2015 mainly due to the business benefitting from a weak Euro currency. However, this should be a one-off and revenue growth returning to more realistic levels of between 4-6% beyond 2015.
In Q115, all divisions reported an increase in revenues quarter-on-quarter. Having said this I expect revenues from the PeP, Express and Supply Chain division to increase at an increasing rate.
With respect to the freight and forwarding division, the outlook is not as convincing mainly due to the high level of competition within this division. However, I expect the other divisions to make up for what is lost.
The company becomes more efficient
One trend which is immediately apparent when analysing the group’s financials is the constant reduction in expenditures when compared to sales.
I expect to see a substantial improvement in operating expenses in 2016 when the one off restructuring costs of the freight and forwarding and supply chain divisions are not incurred.
Profitability expected to increase
I expect to see a continued improvement in profitability even in 2015; the one off costs from the restructuring program will be more than offset by a weak Euro.
Post 2015, I expect both the termination of one off costs and the improvement in global growth to contribute positively towards the bottom line.
Share buyback and/or dividend hikes
The company has a very strong cash base. Some of this cash is expected to be handed over back to shareholders in the form of share buybacks or dividend hikes.
Conclusion
Deutsche Post should be considered as a core holding in a portfolio. For the long term investor, the stock offers attractive capital gains and a decent dividend yield. Additional positives in favour of this investment is a management team which is working to improve the efficiency of the company and a business model which is cyclical and will benefit from an improvement in global growth.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.