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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: swnyc2 (IP Logged)
Date: May 29, 2013 06:08PM

Batbeer2,

You raise very good points. The debt does not so much worry me.
What really worries me is TNTE.

Given that PostNL's holdings of TNTE are equivalent to more than PostNL's total market cap, I think TNTE's value is material.

The level of detail you put into the analysis of postNL is wonderful.
However, I think for someone to really take advantage of the all work that you've done on postNL,they would really need to do their homework on TNTE.

Just my opinion....



Guru Discussed: Mason Hawkins: Current Portfolio, Stock Picks
Stocks Discussed: DPO, PNL, POST, PNLYY, TNTE,
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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: May 30, 2013 12:22AM

Good point.

I think I've "cracked" the question of Össi posts' profitability. I'll write about it here. Maybe I should do some work on TNT after that.



Guru Discussed: Mason Hawkins: Current Portfolio, Stock Picks
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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: portfolio14 (IP Logged)
Date: June 2, 2013 06:15AM

Hi Batbeer2,

I spotted 2 things in the 2012 annual report and would like to know what you think.

1. Note 10 regarding PNL's pension liability on p.98 discloses a cumulative unrecognised actuarial loss of €1,370m. That's a huge amount, big enough to completely wipe out PNL's equity value! (It is unrecognised. It doesn't appear on the balance sheet. But it'll be in 2013 because of change of accounting rule.) Look at the reconciliation table on p.100. The funding status of the pension is -€528m in deficit (NPV of €6,222m asset less €6,750m obligation). Yet, a €1,826m of it is de-recognised, bringing it back to a positive €1,294m net pension asset that appears on the balance sheet.

So, I don't understand what the "102.5%" coverage ratio actually means.

2. PNL has a very elaborated poison pill detailed in Note 9 on p.95 involving an independent entity called the Foundation Continuity PostNL. It is impossible to takeover PNL even if you bribe its board and management.



Guru Discussed: Mason Hawkins: Current Portfolio, Stock Picks
Stocks Discussed: DPO, PNL, POST, PNLYY, TNTE,
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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: June 2, 2013 08:27AM

Hi Portfolio14,

Good points.

>> 1. Note 10 regarding PNL's pension liability on p.98 discloses a cumulative unrecognised actuarial loss of €1,370m. That's a huge amount, big enough to completely wipe out PNL's equity value!

While you are on p100, take a look at the benefits paid (223m). With assets worth more than 6B, that's almost 30 years worth of benefits!

Find me a US stock with a similar pension fund... Hint: I own the only one I know of :o)

The fund paid 223m to their pensioners and managed to collect 340m from PostNL by claiming they have an "unrecognized actuarial loss". Meanwhile, I guarantee you there will be fewer PostNL pensioners in 2025 than there are now. This is accounting lunacy. It will stop.

That 1.3B "cumulative unrecognized actuarial loss" is an effect of the decreasing discount rates and yes, the accountants will be writing that on the balance sheet as per jan 1 2013. It's called IAS 19R. The losses are unrecognized in the same sense that a loss (or profit) from a stock you haven't sold is unrecognized. These liabilities are only fully recognized when the members (including current workers) are dead.

The problem is that the assets are clearly defined while the liabilities are a DCF guesstimate. There's an argument to be made that of the 6B in liabilities, 1.3B are a figment of the accountant's imagination. In fact, if one were to use the average interest rates of the past five decades or so, the liabilities would be worth less than 4B.

What's also missing from the numbers is the point that an underfunded pension plan does not automagically sink PostNL. It's the manager of the pension fund that gets a letter from the regulators that his fund has a problem. The law is there to prevent pension funds (often directed by pensioners) to simply pay current pensioners out of the assets and let the next generation of retirees fend for themselves. That is oversimplifying things a bit but you get the picture.

Parliament has put pressure on the minister to stop sending those letters. They are causing a lot of unnecessary pain. He has rightly retorted that it's the law. Parliament is now proposing some changes.

It boils down to negotiations with the unions. They tend to side with current workers (not former workers). Even so, one recent result of the negotiations is that workers at PostNL are now contributing 2% of their pay. That's tax exempt. Yes, till now, workers weren't paying a dime. That tidbit of news means workers (as opposed to PostNL) are now going to contribute roughly 50m annually. New workers contribute 6%. So the 50m grows. That boosts margin (the cost of the pension is now shared).

From a macro perspective, this is a good way to bet on rising interest rates.

In short, while the accountants and their ever changing standards are making a mess, it doesn't affect my thesis :o)

>> PNL has a very elaborated poison pill detailed in Note 9 on p.95 involving an independent entity called the Foundation Continuity PostNL.

This is not unusual in NL. They will be in court for a decade if they stop a decent deal without proper cause. Many companies have been acquired and/or taken private under the watchful eye of such entities. In the cases they did stop deals, it has been in the interest of minority shareholders.

TNT Express has one too. It didn't stop UPS from making a bid.



Guru Discussed: Mason Hawkins: Current Portfolio, Stock Picks
Stocks Discussed: DPO, PNL, POST, PNLYY, TNTE,
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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: swnyc2 (IP Logged)
Date: June 2, 2013 05:30PM

Batbeer2,

What happens if interest rates go up and the pension plan becomes overfunded? Does PostNL get the money back?



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: swnyc2 (IP Logged)
Date: June 2, 2013 05:37PM

Batbeer2,

>> _Find me a US stock with a similar pension fund... Hint: I own the only one I know of :o)

Is the answer to your question WPO?



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: portfolio14 (IP Logged)
Date: June 2, 2013 06:36PM

@Swync2

> What happens if interest rates go up and the pension plan becomes overfunded? Does PostNL get the money back?

From the annual report: "If the cumulative actuarial gains and losses exceed the corridor, the excess will be amortised over the employee’s expected average remaining service lives and reflected as an additional profit or expense in the income statement." as in FY2012 or before.

I suppose from FY2013 onwards, it will be "mark to model" and the profit/loss will be immediately reflected on P&L.



Guru Discussed: Mason Hawkins: Current Portfolio, Stock Picks
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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: portfolio14 (IP Logged)
Date: June 2, 2013 08:37PM

@Batbeer2,

> 1.3B are a figment of the accountant's imagination.

Now thinking more about it, I think you are right. I was brain-dead. The unrecognised loss jumped from 398m to 1,076m in FY2010. The note does imply change in discount rate was the main factor.

Btw, am I right to think that the 102.5% coverage ratio is calculated as (cash contribution / cash expenses & benefit paid)? i.e. it's all cash based?

That said, I do see a risk here. PNL operates with negative equity. PNL depends on the debt market. Without debts, PNL can't operate. PNL can only sell its debts if it gets proper ratings from rating agencies. When PNL's book includes the mark-to-model pension liability from FY2013 onwards, the rating agencies may lower its credit ratings and push up its funding cost or, even worse, dry up its liquidity.

I actually have a theory about PNL's TNTE holding that's related to this issue. You see, PNL & TNTE were spin-offs. You want to create spin-offs from an existing company because you believe ugly part of the company is dragging down the valuation of its good part. Here, TNTE is the good part and PNL is the ugly part. No one wants to own the boring postal service. You want to keep everything good (e.g. cash) in the good part to maximise its value and leave everything bad (e.g. debt) in the bad part. (Look at how low TNTE's debt/equity ratio is!) But they realised without some equity, PNL couldn't get the proper credit ratings to borrow money. But they also didn't want to give PNL more assets/cash. Their solution was to let PNL hold 30% of TNTE with very stringent terms on the voting rights.

There are 2 other things I'd like to discuss with you.

1. I think your adjusted earnings overlooked the non-cash "earnings" coming from the adjustments to their provisions and pension liability. Their 2012 annual report provides a handy table at the bottom of p.14. (They also show up in the cash statements.) These non-cash earnings amount to 278m and 206m in 2012 and 2011. Look back two more years, they are 239m and 245m in 2010 and 2009.

2. Use these cash operating incomes as a metric, you can see the trend of its different segments:

2012201120102009
Underlying cash Op income total (Euro m)130220341385
mail18154268381
parcel100928161
international275-24-56
others-15-3116-1

The negative trend in mail service is severe. I find it's hard to handicap it, to work out whether the growth in the parcel and the international businesses can offset the decline in its mail service, considered that the operating gearing is extremely significant here. Thoughts?

Appreciate your insights.

p.s. You know a lot about Netherlands. Are you a Dutch?




Guru Discussed: Mason Hawkins: Current Portfolio, Stock Picks
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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: batbeer2 (IP Logged)
Date: June 3, 2013 12:34AM

Hi Swnyc2, Portfolio14,

>> Is the answer to your question WPO?

Yes

>> What happens if interest rates go up and the pension plan becomes overfunded? Does PostNL get the money back?

No. BUT you can use it to offer your workers a decent pension at low cost. Let's say the pension fund does become overfunded. The workers at the competition will have to pay say.... 5% of their gross income to "save up" for their pension while your workers do not. They will obviously prefer to work at your company. OR... the competition will have to make significant contributions while you do not. It's a competitive advantage.

>> That said, I do see a risk here. PNL operates with negative equity. PNL depends on the debt market. Without debts, PNL can't operate. PNL can only sell its debts if it gets proper ratings from rating agencies.

Yes.

>> But they realised without some equity, PNL couldn't get the proper credit ratings to borrow money. But they also didn't want to give PNL more assets/cash. Their solution was to let PNL hold 30% of TNTE with very stringent terms on the voting rights.

You nailed it.

>> I think your adjusted earnings overlooked the non-cash "earnings" coming from the adjustments to their provisions and pension liability. Their 2012 annual report provides a handy table at the bottom of p.14

Yeah... but imagine the discussion on this thread if I had taken that route. I try to keep the thesis simple :o)

>> The negative trend in mail service is severe. I find it's hard to handicap it, to work out whether the growth in the parcel and the international businesses can offset the decline in its mail service, considered that the operating gearing is extremely significant here. Thoughts?

Yeah... 2009 was the last time they raised prices. I expect a gap-up for 2013/2014 and then an ongoing decline. A sawtooth.

>> Are you a Dutch?

Yes


>> Btw, am I right to think that the 102.5% coverage ratio is calculated as (cash contribution / cash expenses & benefit paid)? i.e. it's all cash based?

I don't think so. The contribution/expense is an annual thing (like an income statement for the fund).The coverage ratio should be simply assets over liabilities. Where it gets confusing is that the fund may count a promise by PostNL to pay an X amount for Y years as an asset while the company does not.
Also, the model (used to calculate the liabilities) may be a bit different between the fund, the regulators and the company.

I take the ratio as reported by the fund itself to the Dutch regulators. I can't crunch the numbers from the AR to reproduce 106% or for that matter 102%. My arithmetic skills are worse than the skills of an average 8 year old.



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Re Value Idea Contest - PostNL at 3x Earnings
Posted by: portfolio14 (IP Logged)
Date: June 3, 2013 06:15PM

Thanks Batbeer2!




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