Post Q2 2018 results, we updated our model and maintained our overweight position on Deutsche Post with a price target of €37 on the shares.

When the group reported results for Q1 2018 they had 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, management have proven in Q2 2018 that they are on top of things and sent out a positive message to the market. This being that the analysis phase for the problems in the PeP (post-ecommerce-parcel) division is over and that management has already made good progress in implementing countermeasures.

The weakness in the share price prior to results was factoring in the probability that additional problems would be discovered but this was not the case. That should be reassuring.

We like Deutsche Post for the following reasons:

• We have a 1-year price target of €37 on the stock which represents a potential 20% 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 have provided guidance for 2018 - They expect group EBIT of €3.2bn in 2018 and in excess of €5bn in 2020. We believe these targets are achievable given the disciplined approach management is taking to cut costs to become more efficient whilst at the same time increase revenues.
• The group is benefitting from lower taxes due to the US tax reform

Valuation

Our $37 price target is based on a discount rate of 9% and a forward Price-to-earnings ratio of 18x.

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.

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