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Deutsche Post DHL delivers income with growth

After a multiyear restructuring, double-digit earnings growth is forecast for Deutsche Post in the coming year, along with substantial growth in its already handsome dividend.
June 6, 2013

E-mail was supposed to herald the beginning of the end for post, but the growth being forecast for Deutsche Post DHL (DE:DPW) tells a different story. We think the shares' recent strong run will continue as the group emerges leaner and more profitable from a multiyear restructuring. Analysts now expect earnings to grow at double digits for the next two years, which leaves the shares looking too cheap compared with peers - add in a chunky dividend yield, too, and we rate them a long-term buy.

IC TIP: Buy at 19.33€
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Improving cash generation
  • DHL profits on track for 13-15 per cent increases
  • Strong dividend growth
  • Shares cheap compared to peers
Bear points
  • Weak global growth
  • Acceleration in mail decline

First-quarter results for 2013 easily beat analysts' expectations in the mail operations, which in 2012 were responsible for a quarter of revenues and just over a third of operating profits. Parcel delivery was the standout performer with volumes up 6.4 per cent and revenues 7 per cent ahead on the prior period, as an online shopping boom means over three million parcels are now delivered every day. Letter delivery rose 1.4 per cent, which was impressive against the backdrop of a mail market in structural decline of between 2-4 per cent every year.

This encouraging start led chief executive Frank Appel to reiterate that the mail operations can maintain a stable performance, with revenues and operating profit at around the €14bn and €1bn mark, respectively, for the foreseeable future. In fact, for 2013 he has pencilled in profits of €1.1-€1.2bn, underpinning group operating profits in the range of €2.7-€2.95bn. Analysts at JPMorgan Cazenove recently upgraded forecasts to €2.93bn.

Flat or slightly better results at Deutsche Post may sound boring, but that is exactly what is required. The mail operation holds a dominant position in the economic engine room of Europe, and recently negotiated a 2.8 per cent regulated price increase, the first for 15 years. Angry unions have also been mollified by a two-year pay deal, with a 3.1 per cent increase this August, followed by 2.6 per cent next year, removing the threat of costly strike action.

This all provides a stable platform for the express courier and logistics operations of DHL to really take off. Operating profits are expected to grow at between 13-15 per cent a year until 2015. The signs are encouraging. In the most recent 2012 full-year results, DHL increased revenues by 7 per cent, while operating profit moved ahead by almost a fifth to just over €2bn. Much of this momentum continued into the first quarter with express volumes improving by 10 per cent, well ahead of peers TNT and UPS that could achieve only half that rate.

DEUTSCHE POST DHL (DE:DPW)

ORD PRICE:€19.3MARKET VALUE:€23.4bn
TOUCH:€19.33-19.3412M HIGH:€20.8LOW: €12.6
FWD DIVIDEND YIELD:4.4%FWD PE RATIO:12
NET ASSET VALUE:€7.8*NET DEBT:24%

Year to 31 Dec Turnover (€bn)Pre-tax profit (€bn)Earnings per share (¢)Dividend per share (¢)
201051.42.8221065.0
201152.81.6696.070.0
201255.52.2413770.0
2013**59.32.5614476.0
2014**61.52.9016285.0
% change+4+13+13+12

Beta: 0.89

*Includes intangible assets of €12bn, of €10 a share

**JPMorgan Cazenove estimates (earnings not comparable with previous years)

£1=€1.17

Those growth targets look ambitious in an industry where performance is closely linked to global growth rates - the IMF only recently downgraded the growth outlook for China, for example, from 8 to 7.75 per cent. However, the progress at DHL is being helped by other factors, including its global coverage, stealing work from rival TNT, and the scope to increase margins through its restructuring.

In the past, restructuring charges, one-off fines and high levels of capital investment have all been a drain. Analysts now believe the heavy lifting is largely complete, with improved operational performance decreasing the risk of fines. In the first quarter, group capital expenditure was 28.5 per cent lower at €218m and this, when combined with the mail division reversing last year's €206m operating cash outflow to a €105m cash inflow, meant free cash flow improved by €516m to a €140m outflow. JPMorgan Cazenove forecasts the group will generate almost €1bn of free cash in 2013, a nearly €3bn improvement on last year.

This means the historic 3.6 per cent yield is 1.2 times covered by expected free cash flow, and almost two times by EPS. It also adds credibility to analysts' forecasts for the dividend to increase by 9 per cent this year and 12 per cent in 2014.