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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: michel.dechesne (IP Logged)
Date: May 26, 2013 05:36AM

Hello Batbeer,

Nice analyses, thanks for sharing all your work!

We can assume PostNL is already on the radar of Deutsche Post or the Austrian Post. Do you have an opinion why they didn't catch the bite yet?



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: May 26, 2013 09:38AM

Hi Michel,

1) We are into the realm of speculation here. I enjoy speculation as much as anyone else but it does not affect the value thesis.

2) Like a game of chess, it takes time.

To take down TNT, you need to talk to PostNL and also assess the EU anti-trust regulatory environment. You can't go blindly bidding for a company and then see what you're left with after the regulators have forced you into a forced sale of the the most interesting divisions. That is a career-ending decision.

Through its actions, UPS has set a base price and has caused the EU anti-trust bureaucrats to express an opinion. Anyone else must meet those expectations. There will be hell to pay if the regulators treat the next bidder more benignly. It is entirely possible that UPS knew this going in.

All UPS has done is make it that much tougher for DHL, Fedex et al to acquire TNT. For its part, TNT has announced it is focusing on profitability (core markets). What this means is they are leaving markets with relatively low volume. Why on earth would they leave markets they just entered?

Well.... one effect is that an acquirer has fewer regulators to deal with. By focusing on UK, Italy and France, TNT creates a situation where an acquirer needs to deal with a single regulator to acquire 80% of the volume.

Invert.

Assuming PostNL had a number of companies lined up with an interest in acquiring their TNT Express division, that would explain everything they've done, including the fact that they've retained a 30% stake.

I'd say that is the simplest explanation of recent events. Occam's razor.

PostNL itself IMO has a huge target on its back at current prices. It's mere months since UPS pulled its bid for TNT. While that was pending, the whole puzzle was locked solid. That is no longer the case.

Lutetia capital has something to say about the matter.

It takes time.



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: portfolio14 (IP Logged)
Date: May 27, 2013 03:22PM

Hi Batbeer2,

I've been thinking about this over the weekend.

One question: Why is USPS bleeding for years if regulated postal service can be profitable? (Ignorance on my part. I'm living in Australia.)




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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: May 28, 2013 12:56AM

Hi Portfolio14,

From what I gather (never been to the US myself).....

I'm not sure the USPS is generally unprofitable. Until 2009, I believe it generated income for the government. [www.pbs.org] It's the pension liabilities that are causing problems.

The USPS is severely handicapped because:

- The US postal service operates old-school post offices. In my neck of the woods, All "post offices" are a part of regular shops, including many groceries. I would imagine retailers are quite happy with this arrangement. It drives traffic. PostNL should get the space for free or at very little cost.

- Before closing a post office, the USPS must provide customers with at least 60 days of notice before the proposed closure date, and any person served by the post office may appeal its closure to the Postal Regulatory Commission. The USPS cannot close a post office "solely for operating at a deficit."

- The US is a big place with very long distances and very cheap stamps.... and still people in the US complain. Not all Americans have an international frame of reference.

- The US Postal service is a major domestic employer. Cutting back has an impact on (un)employment rates. In 2009 the average USPS employee received about $79,000 in total compensation. Only 13 percent of the USPS’s workforce is part-time. The figures for UPS and FedEx are a respective 53 and 40 percent.

- Because USPS has a legal monopoly on letters, it is not legally allowed to do other stuff. PostNL has an economic monopoly. Like say... MSFT. The only legal advantage they have is that they are the only ones with the keys to the public letterboxes. For that, they also have the obligation to deliver the contents anywhere within a day.

Like any other business, PostNL has to worry about the anti-trust regulators, it is free to sell cheese or hoola-hoops if they think that would make business sense. As long as the hoola hoop market share is low, anti-trust regulators will allow it.

As we have seen, the anti-trust regulators are most powerfull when it comes to M&A activity. Barring that, European postal services are free to develop their business. USPS is not.

[www.downsizinggovernment.org]



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: silviocast (IP Logged)
Date: May 28, 2013 10:58AM

Hi Batbeer2.

I read and read your article and even took a quick look at the company's 2012 annual report. There's something I don't quite catch in your analysis. Help me out here (round, rough figures):

1) The equity of the company is currently priced by the market at approximately €800m.

2) Net financial debt (without taking the pension plan into account - as I frankly think that they're NOT doing a good job at explaining it in the AR, at least in the english version) is about €1.6bn (€2bn of debt at fair value minus €400m of cash on the balance sheet).

3) The market is therefore valuing the assets of the company at roughly €2.4bn (€800m + €1.6bn).

4) Such assets DO include the stake in TNT, which is sitting on the balance sheet at €1.4bn. That was the value at the end of 2012. Today's value is about €955m.

5) If we deduct the stake in TNT from the market value of the assets, we get roughly €1.4bn as the market value of the OPERATING business (Mail, Parcels, etc.). It's AS IF we sold the stake in TNT at the current market price and paid off an equal amount of debt with the proceeds.

6) At this point, since TNT is no longer part of the picture, we should concentrate on the value of the operating business. Such business generated an operating profit of about €426m (291 + 135 of TNT impairment added back). To make this a CASH operating earnings figure, we need to deduct Capex, taxes and adjust for other non cash items (if any). Let's assume that Capex equals D&A in maintenance mode (no growth), so we won't adjust for that. It seems that no changes in working capital took place in 2012 and the company paid only €40m in taxes. I believe in a run rate situation they would have to pay more taxes. If we tax-effect the above operating earnings figure by applying the 25% Dutch statutory tax rate we would have to deduct €106m. Let's settle somewhere in between and deduct €75m. We therefore get a cash after-tax operating earnings figure of approximately €350m.

7) Let's assume for a moment that we're comfortable with €350m as the company's normalized cash operating earnings, in absence of growth. This is obviously a quick and dirty calculation. In this scenario, the market is valuing the OPERATING business at 4x normalized cash operating earnings.

8) Now, if my reasoning is correct, this - in and of itself - is an attractively low multiple. I don't know how much of a discount we're getting from the company's intrinsic value at such a price, but I would consider it nonetheless an attractive multiple.

9) Finally, if this whole thing is correct (and I apologize for the length of my note), we're NOT getting the stake in TNT for free, as we have already factored that out in the valuation by reducing the amount of debt by almost €1bn (as per sub 5) above). The only way to get the stake in TNT for free would be to NOT have €1bn of debt on the other side of the balance sheet. In such a case we would pay 4x the operating business and - on top of that - we would get the stake in TNT.

Where am I wrong?

Thank you.




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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: May 28, 2013 01:34PM

Hi Silviocast!

>> Where am I wrong?

I do not have enough information to answer that question. Given that your calculations seem perfectly coherent, I would assume you are not wrong at all.

BUT.... I have no idea what it is you are trying to calculate.

It's like asking me if the following formula is correct:



It's a neat formula but without an idea of its application, I would be at a loss to tell you if it is correct.

I can tell you my calculations represent my best estimate of the dividends due the owner of PostNL.

The owner, in my view, could take out (roughly):
1) 1B dividend within a year (TNT shares).
2) A 250m annual dividend for an unknown number of years thereafter.

Also, I can tell you the right to all future dividends of PostNL currently costs 800m.

The question then immediately arises if current management is able and willing to extract maximum value for minority shareholders. FWIW, I think they are giving it their best shot. I don't think dumping the TNT shares on the market within months of UPS pulling its bid would be the best way to extract maximum value.

In short, what is your definition of Intrinsic Value?

P.S.
The formula I gave is only correct if used to calculate the volume of a regular tertrahedron.



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: May 28, 2013 02:44PM

By the way, it seems I missed an important risk: _[www.guardian.co.uk]

Fake stamps.



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: silviocast (IP Logged)
Date: May 29, 2013 08:48AM

Hi Batbeer2.

What I was trying to calculate is how much we're paying for the operating business, without TNT.

A company with 2bn of debt and negative equity does not have, in my opinion, the right financial framework to secure the stream of cash dividends that you've mentioned. I might be wrong, but I just don't see that happening with the current capital structure. Plus, the banks would be all over it. But as a shareholder, I would be happier if they used the proceeds from the sale of TNT to pay off an equal amount of debt, IF I like the operating side of the business and I believe in its prospects. That is precisely why I'm interested in knowing if I'm paying a good price for the operating side.

I think it would be too simplistic to say that 800m is a bargain price because that's less than what the stake in TNT is currently worth on the market. And that's because we have a company with 2bn (1.6bn net) debt and negative equity.

In any event, time will tell.

Hey, thanks for the regular tetrahedron volume formula! :) (That was funny)

In short, my definition of intrinsic value:

I'm a traditional value investor, so I do not value growth. To me, the intrinsic value of a company is what's there TODAY, and that's essentially two things:

1) The assets (tangible AND intangible, as I'm interested in the reproduction value of such assets, i.e. how much would it cost to a new entrant to replicate the business of the company) minus the debt;

2) The cash earnings power (a normalized, after tax, cash operating income that the company would be able to generate in pretty much ANY circumstances. And I'm generally looking for a cash after tax operating earnings yield of at least 15%, or a EV/Cash after tax operating earnings multiple not higher than 6/7x).

If value as per 2) is higher than value as per 1), then (generally speaking) the company is well managed. If the opposite is true, then management is not doing a good job. This is obviously a back-to-the-envelope qualitative consideration, but I've seen that it generally works pretty well.
I'm looking for companies where value 2) is higher than value 1), priced by the market below (or at) value 1), ideally.

Thanks for your reply.
Ciao




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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: silviocast (IP Logged)
Date: May 29, 2013 09:07AM

Sorry, everyone.

I just realized that in my first post to Batbeer2 there's a mistake.

The multiple is NOT 4.00x, but 6.86x, as I did not include the market cap in the enterprise value.

In essence, with €350m run rate, normalized, after-tax cash operating earnings and €2.4bn enterprise value (800m+1.6bn), we're currently paying almost 7x for the operating business.

That multiple is obviously LESS attractive than 4x.

Again, my apologies for the mistake.

[Batbeer2, based on a 15% hurdle cash operating earnings yield, the company would be fairly valued (or slightly overvalued) at the moment: 350/0.15=2.333bn less 1.6bn of debt, 733m.
But again, that's just quick and dirty, without taking into consideration any qualitative factors, or having gone deep into the numbers.]



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: May 29, 2013 11:29AM

>> A company with 2bn of debt and negative equity does not have, in my opinion, the right financial framework to secure the stream of cash dividends that you've mentioned.

Fair enough.

- It's worth noting that the bonds yield 2% though. Bond investors seem to think the company can service its debt with ease.

- In my view, calculating EV for a company that has operational negative working capital needs is certain to overstate the price of the unleveraged operation. (PMD, AMZN, PostNL, OSTK...)



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