We updated our model post Q1/18 results and maintain our overweight position on Deutsche Post. However we reduced our price target from €42 to €37. The main reason for this drop in price target is twofold.
The first is a change in our forward P/E from 18x to 16x. The shares are currently trading on a P/E of 16x. We previously applied a forward P/E of 18x being optimistic about the group’s future given the positive economic data coming out. However, Q1/18 was a difficult month for the group and we prefer to take a more defensive stance. If we see that the difficulties faced in Q1/18 are no longer an issue in Q2/18, we will review our model accordingly.
The second is a concern that a probability guidance won’t be met given the headwinds the company faced in Q1/18. We will get a better indication on whether the Group will manage to overcome the difficulties in Q1/18 when they report the Q2/18 results.
Having said this, our base case scenario assumes that Deutsche Post will 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.
Q1/18 results below market expectations
Q1/18 results disappointed the market due to weakness coming from the PeP (post-ecommerce-parcel) division, which suffered from a combination of lower volumes (fewer working days), more sick days (flu in Germany), a change in product mix (more large letters) and cost inflation (German wages).
However, it is also true that management are dealing with this issue and finding ways how to operate more efficiently to continue to improve the earnings of the group. Management are confident that they will succeed because they kept targets for the year unchanged.
Given management’s capability of delivering on their targets in the past, we are confident management will manage to turn things around. Also, the forex headwind in Q1/18 should turn into a tailwind in Q2/18 given the weakness we are seeing in the EURUSD.
We like Deutsche Post for the following reasons:
• We have a 1-year price target of €37 on the stock which represents a potential 9% 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%
• Global e-commerce continues to boom, meaning that the most important growth driver for our businesses is still intact
• Management has provided guidance for 2018 - They expect group EBIT of €4.15bln in 2018 and in excess of €5bln 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
Sector Analysis:
• Post - eCommerce – Parcel (PeP) – this segment was the weakest link of the Group in Q118 and was the main reason why the Group did not meet consensus estimates for Q118. This division suffered from a combination of lower volumes (fewer working days), more sick days (flu in Germany), a change in product mix (more large letters) and cost inflation (German wages). Efficiency improvements at both the operating level and in terms of overheads are targeted for the remainder of the year in order for the Group to meet its targets
• 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 this 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 - €1.5 billion 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 Deutsche 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 are 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.