We updated our model and maintain our overweight position on Deutsche Post with a price target of €42. This price target is calculated on a forward price-to-earnings ratio of 18x compared to its current P/E of 15.5x. We believe the stock merits to trade on a higher P/E as we expect it to continue to benefit from increased sales and reduced costs which should improve margins going forward. We expect growth going forward to come from e-commerce and expansion in emerging markets.

We like Deutsche Post for the following reasons:

• We have a 1 year price target of €42 on the stock which represents a potential 22% upside from the current price
• The shares are trading on an attractive indicative gross dividend yield of 3.5%
• Strong cash position - Excess liquidity will be used for share buybacks and/or extraordinary dividends. In fact, in 2017 Deutsche Post increased its dividend payout ratio to 52% from 48%
• The group saw an improvement in revenues from all its divisions in Q417 and expect to see continued growth in the foreseeable future
• Management have provided guidance for 2018. They expect group EBIT of €4.15bn in 2018 and in excess of €5bn in 2020. We believe these targets are achievable giving the disciplined approach management is taking to cut costs to become more efficient whilst at the same time increase revenues
• We expect revenue growth from all divisions:
− Post - eCommerce – Parcel (PeP) – the Group is managing to continue to increase market share in the parcel business and it is making up for the drop in traditional letter business by focusing on increasing its parcel business. In 2017 46% of revenue from this division came from the parcel business (compared to just 20% in 2010). It continues to grow through acquisitions to expand in the international parcel business as well as enlarging its e-commerce business. We expect this positive trend to continue in the foreseeable future
− DHL Express – this division is benefiting from both volume and price growth. This has always been the strongest division of the group and the main driver of profits. We expect these divisions to continue to generate positive returns towards the group given our positive outlook on the Global economy
− Global Forwarding, Freight – this business division is coming back slowly. It has always been a drag on the group due to high level of competition in this business. However, we are seeing an improvement in this segment too especially because the new IT system is complete so the division is expected to incur less costs going forward, improving its profitability
− Supply Chain - €1.5bn order intake again at record levels. We expect this division to continue contributing positively to the Group in the current positive economic environment
• The group is benefitting from lower taxes due to the US tax reform

Outlook for year end 2018

We expect the group to continue to see positive growth in all divisions as well as an improvement in margins going forward from both high prices and lower costs. Deutsche Post also has a strong cash position which it can use to buy back its own shares or increase its already very attractive dividend. We suggest that Deutshce Post shares should form part of a well-diversified portfolio given our positive outlook on the Group and global economy.

About the Group

The Deutsche Post AG, operating under the trade name Deutsche Post DHL Group, is a German postal service and international courier service company, the world's largest. With its headquarters in Bonn, the corporation has 510,000 employees. The postal division delivers 61 million letters each day in Germany, making it Europe's largest such company. The Express division (DHL) provides services in 220 countries.

Disclaimer:
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.