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Value Idea Contest - PostNL at 3x Earnings

May 22, 2013 | About:
PostNL (PNL) is the Dutch postal service. By law, the company may charge $0.60 for carrying a letter from Breda to Borger. The U.S. postal service provides a similar service. USPS charges $0.46 for taking a letter from Baltimore to Butte. Any Butte.

Perhaps unsurprisingly, PostNL is profitable. A series of one-time charges has obscured this fact, driving the stock down to 3x normalized earnings.

If that’s not cheap enough for you, PostNL owns 162 million shares of TNT Express. Those shares are currently worth $1.2 billion. This is remarkable in light of the fact that PostNL itself has a market cap of $1 billion.

Mason Hawkins owns a chunk of TNT Express. Presumably he thinks that stock cheap. Sarah Ketterer owns 6% of PostNL.

I) Business and History

For U.S. readers, it may be helpful to think of the Netherlands as the state of Maryland. Maryland is a small state with lots of water and people. So is the Netherlands. The head of state of the Netherlands is a king. Maryland has Nancy J. King.

Government has charged PostNL with the obligation of executing the so-called Universal Postal Service. Among other things, this means the company:
  • Must deliver mail six days a week at any address throughout the country. As of 2014, that’s five days.
  • Must deliver at least 95 percent of mail by the next business day.
  • Has the exclusive right to install and empty public letterboxes.
  • Must operate at least 2,000 service points (post offices).
35024_13692164601tqU.png

I’ll skip 200 years of history to the last couple of decades, starting with the IPO.

In one form or another, PostNL has been publicly traded since 1994. That year, the Dutch post and telecommunications company (PTT) held its IPO in Amsterdam as KPN.

1996 – KPN acquires TNT (Thomas Nationwide Transport). TNT was founded in Australia in 1946.

1998 – KPN's postal division is combined with TNT, then listed separately on the Amsterdam Stock Exchange as TPG.

1999 to 2005 – TPG moves into the logistics market with the acquisition of several international logistics companies.

2011 – 70% of TNT is demerged and holds an IPO. The remaining stub is renamed PostNL.

2012 – United Parcel Service (UPS) announces its intention to acquire TNT, including the 30% stake owned by PostNL.

2013 - UPS takeover of TNT fails.


II) Competitive Advantages

While most would agree that a postal service is a textbook example of an operation with insurmountable barriers to entry, a simple Google search reveals that the moat is generally misunderstood.

On the U.S. postal service: “It's a natural monopoly (which means it has huge economies of scale). A second competitor would need to make enormous investments to duplicate the USPS' infrastructure.”

This is about as dumb as it gets. The fact is, capex as a percentage of sales at PostNL, Deutsche post and Österreichische post is around 3%. That is much less than Intel, Blackberry or for that matter Disney spend. This business is not capital intensive, it is labor intensive.

PostNL employs 60,000 people. About 40,000 are part-time postal delivery workers. The total full-time equivalent workforce is roughly 30,000.

The core driver of revenue and profits is the delivery worker walking down a Dutch street delivering mail at €0.50 cents per letter.

35024_1369216458CF75.png

In a typical Dutch street, that worker should be able to serve 200 addresses per hour. At two letters per address, that’s €200 of revenue.

With 40,000 workers, each generating €400 of revenue (two hours of work) for 300 days, €5 billion of annual revenue would be generated. I’m using very rough numbers here but the result does make sense. PostNL’s revenue is €4.3 billion.

The moat comes from efficiently utilizing the labor force. If you have 10% of PostNL’s market share, your worker still has to walk the length of the street but delivers just 10% of the volume. That doesn’t leave enough margin to cover your overhead.

That is why the competition (Sandd) delivers printed matter once or twice a week. They save up the printed matter and send their workers out only if there’s enough volume to generate enough revenue.

In short, there is no way the competition can provide a regular daily service at a cost that comes close to that of the incumbent.


III) Financial Strength and Profitability

35024_136921645973zt.png

In recent years, earnings before interest (excluding D&A) is at least €400 million. That’s 4x the interest expense of €100 million. The company services its debt with ease. Of course, they also have some €1 billion worth of stock that they could sell if they somehow ran out of cash.

This company isn’t going bankrupt any time soon. Bond investors agree. PostNL’s 2015 corporate bonds currently yield 2%!

Though the income statement is a mess, an analysis of the numbers gets us a reasonable estimate of run-rate earnings of €240m. In 2012, the company took an unusual non-cash depreciation charge. The amount never exceeded €110m in prior years. €110m is 20% of net PP&E which seems a more than reasonable rate of depreciation. The amount taken in 2012 was twice as high. Adding back that unusual item gets an EBT of €253m for 2012.

Another way to estimate earnings is using a multiple of taxes. PostNL consistently pays taxes to the tune of €80m. At a conservatively estimated tax rate of 33% that implies pre-tax earnings of €240m.

Just to check for sanity, the postal service of Austria (another publicly traded postal service) generates more than €240m. While Österreichische post has been free to focus on operational efficiency for a number of years, it is a simple fact that Austria is 4 times the size of the Netherlands with roughly half the population. Barring arrant operational stupidity, PostNL should out-earn Össi post by a very wide margin.

The EBIT margin of the mail division of Deutsche post also supports the estimate of run-rate earnings.


IV) Management

The CEO, Herna Verhagen was promoted to the CEO role last year. She has been with the company in various roles since anyone cares to remember. She earns roughly €300,000. At year-end 2012, she owned more than 40,000 shares of PostNL. This was up from 16,000 the year before.

This does not include any granted rights on shares allocated under PostNL’s participation in the variable compensation scheme.Assuming an average cost of €3 per share (2012 prices), the incoming CEO spent roughly 20% of her gross income buying stock. In Holland, that’s more than 30% of her net income!

Jan Bos, the CFO, has been with the company in various financial roles for many years. Since the demerger, he too has been spending a very large chunk of his income accumulating shares. At year-end 2012 he owned 38,000 shares up from 14,000 the year before.

While this team doesn’t have a decades-long track record of shrewd capital allocation, they are decent, hard-working and respected operators. They are clearly investing a meaningful chunk of their income along with shareholders.


V) Value and Price

PostNL shares are available in Amsterdam (Euronext - PNL, € 1.81). For Americans, there’s also an ADR (OTC - PNLYY, $2.29)(PNLYY).

That is what we are paying. What are we getting?

We are getting:

1) PostNL owns 162 million shares of TNT Express, currently worth €1 billion. Per share of PostNL, that’s €2.20 worth of TNT stock. ($2.85 per ADR).

2) Normalized earnings of PostNL, without TNT, is roughly €240 million. That’s €0.55 of EPS. At an admittedly arbitrary 5 times earnings, that’s another €2.75 worth of value. Per ADR this works out to $3.55 of value.

By my estimates, we are paying €1.85 to get €5 of value.


VI) Catalysts

In January, UPS pulled its bid for TNT Express. That was a pricey decision. UPS now has to pay a €200 million break fee. Thirty percent of that is €60 million in cash that rightfully belongs to PostNL. That cash is going to turn up somewhere.

At current prices, PostNL is a takeover target and/or LBO candidate.

PostNL has raised prices 10% this year. Questions were asked in parliament. They were convinced by the argument that Dutch postal rates were still well below European averages. With Christmas yet to come, PostNL’s revenue should be up at least 5%. That should have an impact on 2013 earnings.

As of 2014, Delivery on Mondays has been canceled. Mail volume on Monday is 2% or so. Assuming labor costs on Monday are 5%, that works out to roughly €100 million of incremental operating income. This too was defended in parliament by the responsible minister given that 5 day delivery is within European standards.


VII) Specific Risk

Market risk. PostNL’s shareholders are/were generally speculating on a takeover of TNT express with no regard to the fundamentals of the business. Headlines determine the direction of the stock in the short term.

Cash diversion. Barring an acquisition of TNT express, management may use excess cash (if any) to reduce debt and/or accelerate the funding of the company’s pension liabilities. This rules out the dividend crowd for now which I presume to be the natural owners of this stock.

Pension liabilities. By law, Dutch pension liabilities must be 102% covered by assets. In U.S. parlance, Dutch pension funds are by definition overfunded. This law has been a major headache for many Dutch companies. As discount rates (tied to interest rates) have dropped, the book value of the pension liabilities has risen tremendously (this is a DCF model). Had UPS bought TNT express, this would have been a trivial accounting issue for PostNL. That didn’t happen and PostNL was forced to cut its dividend to fund its pension liabilities. Most recently, the pension fund reported being overfunded to the tune of 106%. Nevertheless, it remains a risk.


VIII) Why Is This Cheap?

The income statement is a mess. The company says:

As a result of the UPS offer, the share price of TNT Express increased from €5.77 on Dec. 30, 2011, to €9.26 on March 30, 2012. This increase resulted in a partial reversal of the 2011 impairment charge on the stake in TNT Express of €570 million and increased its carrying value to €1,502 million as at March 31, 2012. Since its classification as asset held for sale, the share price of TNT Express declined from €9.26 to €8.43 on Dec. 31 2012, resulting in an impairment of €135 million and reducing the value of the stake in TNT Express to its market value of €1,367 million as at Dec. 31, 2012.

This is a postal service. Everybody knows postal services aren’t be profitable. Again, as dumb as it gets.

Speculators are leaving in disgust after UPS’s bid for TNT Express (TNTE) fell through. Dividend investors left soon after when PostNL cut its dividend. This appeals only to the value investing community. With due respect, they’re a fairly miserly bunch.

Disclosure

This is not a recommendation to buy or sell anything. At the time of writing, I had no position in any of the stocks mentioned.

Any and all questions welcome as usual.

Read more:

Annual report

Five years of financials of PostNL. Other sources include the results of (now demerged) TNT.

PostNL bonds

Österreichishe post

European postal services

Developments in the Dutch postal market

Good discussion at oddballstocks (2011)

PostNL dividend policy

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.8/5 (28 votes)

Comments

gusto.duel
Gusto.duel - 1 year ago
Hidden in plain sight, was it...
batbeer2
Batbeer2 premium member - 1 year ago
LOL @ Gusto.duel

Yes.

Screeners don't catch these. You need to read the papers (or watch the news). Also, you need to chat with the neighbors who happen to deliver mail ;o)

We shall see how this works out though. It may be cheap but if it is, it has been cheap for a while. It may remain cheap for a lot longer. ì personally don't mind as long as the business keeps developing according to my expectations.

We should be able to count the cash as it flows in. I for one will be watching like a hawk what they spend it on. I expect them to accumulate the cash (retiring bonds at 2% is not smart) and announce a new, conservative, dividend come next year.

My only hope of winning the contest is if Deutsche post or Österreichische post are reading this stuff.
minkun
Minkun - 1 year ago


rgarga
Rgarga - 1 year ago
First of all, thank you for highlighting this stock. I have a few questions...

1. I have a hard time valuing Tnt in the setting that ups can't buy it. Fedex is waiting for firesale price which may become the case if tnt keeps losing money

2. Earnings were down 50% besides tnt event. Certainly 5 day work week and raising prices is good but if revenues keep falling, then I dont know what to predict as profits.

Seems too hard but agree that if tnt has real value and is sellable, this is dirt cheap.

Please help me understand.

Rahul
cdubey
Cdubey - 1 year ago
The company has €1.6 bn in long term debt. The EV will be at least €2.4 bn ? Can you please say something about the balance sheet and the pension liabilities i.e., how much are we actually paying ?
batbeer2
Batbeer2 premium member - 1 year ago
Hi Rgarga,

Valuing TNT is an entire analysis by itself. Since I make a point of looking at everything Hawkins holds, I may be back :o)

>> I have a hard time valuing Tnt in the setting that ups can't buy it.

1) I think the fair value of TNT should be looked at on a per-country basis. TNT has its roots in Australia and that is obviously a fantastic monopoly by itself. They have been expanding into different geographies which does cost money so earnings may be understated....

2) In my view, from PostNL's perspective, TNT is perfectly sellable. Trading volume of TNT is 2m shares per day or so. PostNL should be able to dump their shares within a couple of years without creating too much waves. They won't but they could. With their 30% stake PostNL could also push for a (partial) break-up.

Tex Gunning is the new TNT CEO. This is a manager with a very good record (Unilever, Akzo...). Most recently, he led Vedior before it was sold to Randstad. He was planning on retiring but agreed to come to TNT. In my view, this is not a man who is going to lead TNT into the next decade as an independent company.
batbeer2
Batbeer2 premium member - 1 year ago
Hi Cdubey,

EV is a theoretical proxy for the somewhat practical value I used. Nevertheless, using the EV framework (I use rough numbers):

Take $2B of debt.

Add $1B of unfunded pension liabilities. That is no longer the case today but hey...

Add in the $1B of market cap

Deduct $500m of excess cash.

Deduct $1.3B of TNT shares.

That gets you an EV of $2.2B so we seem to agree.

In dollar terms you then use $400m of earnings to get a multiple of 6.

But that's wrong!

1) You are double counting the interest expense. You deduct the interest expense from earnings but also add the debt back to the cost (EV).

2) PostNL is a company that naturally operates with negative equity. They sell stamps first and provide the service later. Then they pay the salaries even later. In fact, a lot of stamps are never used. I happen to collect stamps.

I wrote about this phenomenon on the Overstock thread. Using EV or for that matter BV on a company with operational negative equity is less than smart. I forget the name of that inane ratio used to predict bankruptcy. Using such metrics was an important reason why Overstock was cheap. People were using models, ratios, and calculators, not their brains. They thought it was going bust while in fact the company was overcapitalized.

That is why I say:

We are paying $1 billion for a company that is generating more than $300m of earnings.

- After servicing its debt.

- After paying for the pension liabilities.

- Without taking into account the stake in TNT Express.

Hope this answers your question of "what are we actually paying?".


P.S.

Frankly, if you have any model or ratio that shows PostNL to be expensive, doubt the model, not the stock.
cdubey
Cdubey - 1 year ago
@Batbeer2: Thank you. I will give it a closer look. I actually find 3 companies interesting at the moment. Jakk, Bouygues and PostNL. I will probably end up picking just one.

Thanks for the idea.
cdubey
Cdubey - 1 year ago
Something to know.

An important factor in re-establishing PostNL's targeted BBB+ / Baa1 credit rating will be a reduction of the outstanding debt, using part of the proceeds from a gradual sale of the 29.8% shareholding in TNT Express, thereby improving the financial ratios.
batbeer2
Batbeer2 premium member - 1 year ago
Yeah.... here's the source

>> PostNL expects its financial ratios to be in line with a BBB+ / Baa1 in 2016.

They won't be retiring the bonds before they mature. The 2015 bonds ($400m worth) yield 4% (nominal) and 2% (market). With the company currently sitting on 400m in cash, methinks that's an easy target management has set for itself.
agaglio
Agaglio - 1 year ago
If this is really trading at 3X normalized earnings, why don't you have a position in it?
batbeer2
Batbeer2 premium member - 1 year ago
Hi Agaglio,

1) I currently don't have cash to spare.

2) I don't think PostNL is significantly better than what I already own.

If I wrote only about what I owned, I would write a couple of articles per year. I look at dozens of companies though and I like to share my thoughts. See if the GF crowd can poke some holes in the thesis.
varunfriend
Varunfriend premium member - 1 year ago
I have taken positions after reading some of @batbeer2 ideas WPO, COCO, QUAD, DJCO to be specific. If I understand the business, I tend to start with his thesis and then try to kill the idea. As of yet, I am yet to find anything in any of the ideas that prevented me from taking substantial positions ... and its worked out great so far!

Keep up the good work @batbeer2.
batbeer2
Batbeer2 premium member - 1 year ago
Hi Varunfriend.

Thanks for the kind words.

I hope you do obscenely well on those positions.

I didn't say that to be nice ;o)
portfolio14
Portfolio14 - 1 year ago
Hi Batbeer2,

This is a brilliant find!

2 questions:

1. You said it was a "risk" they had to reserve more for the already overfunded pension liability. Is it really a risk? They just put the money aside. It means they are forced to have a bigger capital base and it reduces ROC. Is that what you mean by "risk"?

2. Do you know how to follow you via RSS or email alert? Even I have enough IQ to read Security Analysis cover to cover, I have a hard time to figure out how to navigate the GF site... (The RSS button below your photo in the article will only give me the feed for the entire GF site, not filtered.)

batbeer2
Batbeer2 premium member - 1 year ago
Hi portfolio14,

>> Is that what you mean by "risk"?

If discount rates for pension liabilities drop further, the discounted value of future obligations rises. If that is not offset by gains in the pension fund, they will have to come up with the cash. The asset side of the fund has performed well in recent months but that doesn't mean it will in future. Cash that flows to the pension fund is never coming back to shareholders even if a future reversal of discount rates causes the fund to be overfunded.

Of course, discount rates could rise instead of fall. That would be good for shareholders since the fund would no longer be the cash drain it has been.

Come to think of it, if that happens, PostNL would probably find a way to utilize the funds to let some surplus workers go with a decent (early) retirement deal.

This is not such a brilliant find. It is well known in NL that the TNT stake alone is worth more than the PostNL shares are worth. What is not widely understood is that PostNL is profitable. I believe the investing community hasn't picked up on the idea that if TNT Express isn't generating lots of GAAP earnings, the earnings of the combined company must have been generated by PostNL. You can use the GuruFocus 10-year earnings to get an idea of the profitability of the combination pre 2011.

>> Do you know how to follow you via RSS or email alert?

I'm sorry. To me RSS is either a very fast car or a very bad disease. They tell me it has something to do with the internet too. Under "Home">"Contact" you can open a ticket. The response is pretty fast.

Thanks for the kind words.
buynhold
Buynhold - 1 year ago
Batbeer,

As always, a very interesting, off-the-beaten-track idea!

1. I like to look at businesses as if they were unlevered (for an apples to apples comparison with others). It also gives me a very conservative appraisal. If I do that (payoff the debt and add back the interest expense), I get a 45% discount to estimated IV vs a 60%+ discount based on your valuation. Still impressive!

2. Given that interest rates are at multiple decade lows, I am not worried about pension liabilities. In the medium to long-term, they are likely to get revised down as rates eventually revert back up. Hopefully the asset side is managed well enough to not fall even more than the reduction in liabilities :).

3. 50% of their revenue comes from domestic mail delivery, which is declining at a mid-single digit rate (presumably a secular trend with paper mail). As this neighbor of yours has to now deliver fewer & fewer pieces on his route, it will hit the bottom line even more. At best, regular price increases + scaled-back delivery schedules (the government may limit this) may allow them to offset this, but I don't see much chance for an increasing earnings coupon here. Worst case this decline can more than offset all benefits from the growing and high-margin parcel segment, and you could get a decreasing intrinsic value over time, narrowing the margin of safety while one waits.

What am I missing here?

batbeer2
Batbeer2 premium member - 1 year ago
Hi Buynhold,

>> What am I missing here?

1) The conection with Berkshire Hathaway :o)

In the Berkshire Q&A session, Munger commented on the postal service in Italy. The postal service there is simply not trusted. Guess who is growing in that market?

I think PostNL has the advantage of having been run as a publicly traded company for more than two decades now. They can become a major pain in the behind for the likes of the Italian or UK postal services. The EU may not be perfect but it does create an open market.

It may be worthwile to track the percentage of domestic revenue as a percentage of the international operations.

2) For myself, I'm still trying to figure out just how Össi post is able to earn more than PostNL. PostNL should logically be able to earn twice the EBIT. If I figure that out, I may have an idea of where PostNL currently has inefficiencies. In other words, where they can gain operational efficiency now that they are a pure-play.

But yes, I don't think of PostNL as a growth business. I also honestly don't think I will live to see the day that we no longer have a postal service. It will be different but it won't be gone.
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

Here's my concern:

The post office is heavily regulated. They cannot set their own prices. Post offices around the world are often forced to provide services and keep under performing offices open because elected officials are trying to please their electorate. The Dutch government is likely no different. Their goal is not to make a profit or return cash to shareholders. If they see cash being returned to shareholders, they will likely delay future price increases to try to please the electorate. They will do everything they can to wring cash out of the company.

Your thoughts?

batbeer2
Batbeer2 premium member - 1 year ago
Hi Swnyc2,

Logical concerns. I'm a bit less pessimistic about future profitability though. Time will tell.

Macro level: The governments of:

- Italy

- UK

- France

....

would be happy to get a similar service at the same cost to taxpayers. In most other places, government has to fork over heaps of money to pay for/subsidize the system. Dutch taxpayers know it and so do UK taxpayers not to mention the Italians. It's an outright postal strike (unions!) that scares the politicians not the price of stamps.

Lower level: Government has an obligation to provide a universal postal service. PostNL provides this.... but at a cost. The day the universal service becomes unprofitable, the regulatory authorities are required to let PostNL raise prices. Voters will be told that prices are lower than elsewhere. This sounds reasonable enough. Of course, NL is a small place with a lot of people. High density.

You can think of PostNL's infrastructure (service points and letterboxes) as being paid for by the universal postal service agreement. This - as you point out - wasn't created for the benefit of shareholders.

BUT... any synergies that they generate off that operation accrue to shareholders. That part of the business is unregulated. Of course, PostNL shoves as much cost as it can into the universal postal service part of the business. As long as stamps cost less than elsewhere in the EU, they can and do get away with it.

I refer those who deem this less than ethical, to the macro points I mentioned above.

Bit level:

PostNL always has a "free" service point within a few miles. It you count the locations, PostNL is the nations largest retailer. Meanwhile, they are allowed to earn as much as they like in the (unregulated) package delivery business. Of course, PostNL has a head start there (literally). Consumers can dispatch packages when and where they like. For consumers or soho businesses, this is a major selling point. The competition (UPS et al) need to dispatch a courier to collect the package. PostNL only needs to dispatch a courier to deliver.

UPS/DHL etc. work fine for business to business and business to consumer. Especially if the collecting courier can pick up multiple packages in one trip (Amazon). It doesn't work for consumer to consumer. It's simply more convenient for the sender to walk/drive to the nearest service point. Waiting for a courier is inconvenient. Especially if you had to go buy a box or container to pack the goods. If your're at the shop already, you're better off dispatching the package on the spot.

I think that's why the international business is growing. Packages sent from NL are taken care of within PostNL's distribution network if they know they can profitably do an end-to-end service. If not, they can always offload the package on Fedex or for that matter TNT. PostNL obviously knows where most of their packages are headed. They can opportunistically set up local delivery networks at the destination (as long as it's within the EU). London is becoming big. This makes sense since the UK is a major trading partner of NL.

In short,I believe there's room to earn some money here for some time to come.

swnyc2
Swnyc2 - 1 year ago
Batbeer2,

Do you have a typo for the value of TNT express (you quoted $3.85 per ADR)?

Did you mean $5.85??

batbeer2
Batbeer2 premium member - 1 year ago
$2.85 of TNT value per PostNL share.

There are 440m PostNL shares with a right to 162m TNT shares.

That's 0.37 TNT shares per PostNL share. TNT shares trade for € 6.00 or so.

0.37 x €6 = € 2.2 = $ 2.85

Hope this helps.

P.S.

So yes, that's a typo, thanks!

It should have been $2.85 instead of $3.85. I've corrected it now.
buynhold
Buynhold - 1 year ago
Batbeer,

What's PostNL's competitive advantage in the international business if NL is not the origin or destination? They may be more efficient than the incumbent universal service provider in Italy/UK/France, but they will need to compete on equal footing with other private carriers.

Any idea what Össi post's pension expenses are? I am also curious as to how they can earn as much as they do when they have 80% as many employees as PostNL but just half the revenue?

batbeer2
Batbeer2 premium member - 1 year ago
>> I am also curious as to how they can earn as much as they do when they have 80% as many employees as PostNL but just half the revenue?

I've figured that out now. Oesterreichische post delivers a lot of unaddressed mail (advertising) as well as regular mail Their per capita volume is therefore higher. PostNL does not.

-EDIT- I need to do some further research on this. great point, thanks!

>> What's PostNL's competitive advantage in the international business if NL is not the origin or destination?

None. BUT

NL is the destination or origin of A LOT of stuff in Europe. NL may be small but the country is basically a delta where the major rivers of Western Europe converge. It's a distribution hub. There's a reason the port of Rotterdam is the largest in Europe and Amsterdam airport has more traffic than New York, San Francisco, Shanghai (pudong), Seoul or Munich.

You will be hard pressed to find a Dutchman who doesn' t speak either English, German or French very well while having a pretty good grasp of the other two.

The point here being that NL generates a lot of International traffic (including letters and small packages). That's not going to change soon.
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

>> I've figured that out now. Oesterreichische post delivers a lot of unaddressed mail (advertising) as well as regular mail.

Out of curiosity, how did you "figure it out?" From looking at the financial reports?

gusto.duel
Gusto.duel - 1 year ago
An older analysis posted on VIC : _http://www.scribd.com/doc/45118096/TNT
batbeer2
Batbeer2 premium member - 1 year ago
Thanks for the link gusto.duel

Quoting the author:

>>The short-thesis is based on following key points:



1) The passage of liberalization of postal service in the Netherlands in 2009 has opened up the domestic mail market to competition from foreign as well as domestic players. This will likely drive down prices for domestic mail business significantly.

2) The company is the high-cost player and as a result stands to lose significant amount of market share due to its inability to price competitively

3) Secular declines in mail volumes are likely to add incremental pressure on what is a high-fixed cost business with high negative operating leverage


With due respect, this is well-phrased nonsense.

1) Prices have not dropped. They've gone up. I do have the benefit of hindsight though.

2) PostNL may be the high cost player but then as now, they were the only profitable player. The two challengers that took on PostNL after the liberalization (Sandd and Selektmail) never made any money. Sand aquired Selektmail in 2011 in an effort to gain market share. Selektmail was a subsidiary of Deutsche post. So.... Deutsche post has left PostNL's home turf. PostNL is operating profitably in Germany. Due to the merger, Sandd is now twice the size. It has yet to report a profit though.

3) By no stretch of the imagination is this a high fixed cost business.

IMO the main mistake is the blind assumption that the business is capital intensive and thus has high fixed costs. A two-second check of the numbers of PostNL or any of its comps immediately shows this to be wrong. Capex as a percentage of revenue is consistently very low. I'll grant that this single assumption does logically lead to the dire conclusions.

In the words of Mark Twain: It's not what you don't know that kills you, it's what you know for sure that just ain't true.

Having said all that, it would have worked out very well for anyone who did short this in 2010.

@ Swnyc2, buynhold,

I'll be back about O-post. Reading up a bit on the regulations and revenue breakdown. I got the information about the revenue breakdown from O-posts annual report.The volume of unaddressed mail they handle is almost twice the volume of addressed mail (page 30).
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

Thank you for a wonderful analysis and including lots of references about PostNL. It certainly seems like a very cheap stock.

>>See if the GF crowd can poke some holes in the thesis.

Given your request, I have several questions I was hoping you might address:

1. Perhaps I missed this, but what happened in May 2011? The price of the ADR (PNLYY) was fairly stable until then. It had varied between $13-$30. However, after the spin off of TNT, the price of PNLYY rapidly decreased to ~$2.60 per ADR. Also, TNTEY's price rapidly decreased as well in the second half of 2011. What was the rationale for the spin off TNT? Usually companies do that to increase shareholder value. In this case the exact opposite seems to have occurred.

2. Is it fair to value TNT Express at market value? At first, this seems quite rational. However, based on what I know about the stock, I wouldn't buy it. In the international shipping business, size should matter. However, TNT is a distant fourth when it comes to size. With revenue of ~$9 billion, it is far smaller than UPS ($54 B), Deutsche Post ($56 B), and FEDEX ($56 B). Furthermore, TNT's revenue is not growing quickly. In fact, its decreasing. TNT's revenue has decreased 5% in the last year, while the revenue of its three larger competitors has grown. Other comparator's are unfavorable as well. For example, TNT has an ROE of only 1.3%. For UPS and Deutsche Post, ROE is 15%. For FDX, ROE is 11%. With little to no moat and given the fact that the EU has basically declared it will not be bought, I don't see a bright future for TNT.

3. While it's a neat idea, I think it's overly simplistic to compare the efficiencies of Dutch and Austrian mail delivery simply by comparing land areas and populations. Perhaps there are other significant differences between the countries? For example, is there a difference between the two countries in the fraction of the population that lives in cities?

4. The last reference you supplied goes to great length assessing the expected future decrease in business (3-6% per year over the next decade). If this is really the case, is it fair to value the company at 5x earnings?

5. >> My only hope of winning the contest is if Deutsche post or Österreichische post are reading this stuff

Really? Do you think the Dutch politicians would let PostNL be taken over by a company from another country? I will defer to you on this one, since you are Dutch and I have not been to the Netherlands, but I could never envision the U.S. government letting a foreign company take over the U.S. postal service.

batbeer2
Batbeer2 premium member - 1 year ago
Hi Swnyc2,

Thanks for poking some holes. Good questions, some of them need further research on my part.

>> Do you think the Dutch politicians would let PostNL be taken over by a company from another country?

Oh yes. That won't be a problem. This is a publicly traded company. (Almost) anyone can buy it. Nobody gives a s#!t that Sarah Ketterer owns 6%. In fact, there will be uproar if government interferes with a decent bid. NL is not Argentina or for that matter the US :o).

>> If this is really the case, is it fair to value the company at 5x earnings?

I have no opinion on the fairness of p/e multiples. Seriously. This is at the core of my investing philosophy. I define intrinsic value as the price I would be willing to pay to own a company outright. With current management in place. My own hurdle rate is currently 30%-50%, implying an earnings multiple of less than 3.

What I do know is that volumes have been declining for a long time. Meanwhile, PostNL's profits have been fairly stable. Yesterday, it struck me that the liberalization of the postal service has caused prices to go up. This makes sense. government-run postal services are subsidized and stamps are artificially cheap. Case in point.... US.

>> For example, TNT has an ROE of only 1.3%. For UPS and Deutsche Post, ROE is 15%.

ROE of TNT is depressed because of the intangible assets on the balance sheet. That is the result of its (accounting) history, not its run-rate profitability. TNT is the dominant player in the UK and Australia. They have moats ;o)

There is more to TNT than meets the eye. Nate Tobik did some work.


>> Perhaps there are other significant differences between the countries?

There are. After reading up a bit, I now know there's a very important difference in the "definition" of the universal postal service. Austria aggregates more volume under that definition, including periodicals (newspapers and magazines). I'll be back on that.

NL is more urbanized than Austria. You can also safely assume the infrastructure is superior in the sense that there are more highways, more barges, more trains, more planes, more trucks and more navigable rivers, lakes and canals per capita or square kilometer than in Austria.

>> Is it fair to value TNT Express at market value?

That is the most reasonable estimate of it's current market value. The outright owner could simply sell that stake. PostNL management could distribute the shares. That is a more rational approach than dumping the shares on the market don't you think? I'm not expecting either scenario anytime soon. I'm just pointing out that mark-to-market is not an unreasonable approach in this particular case.

>> What was the rationale for the spin off TNT?

With the rest of Europe privatizing its postal services, there is probably going to be some consolidation. I think TNT and/or PostNL are both acquisition targets. UPS is not the only potential buyer. The combination of PostNL and TNT would be impossible to sell. It would cause a lot of anti-trust problems.

Deutsche Post would run into the same problems as UPS if they tried to buy TNT. BUT by selling Selektmail to Sandd they now have the option of bidding for PostNL. They could (rightly) argue they have 0% share in NL.

In short, the split-up has made the parts more sellable.

I WILL do some work this week on Austria versus NL... stay tuned. I also expect this to shed some light as to the sustainability of profits in NL.

I MAY do some more work on TNT. That would be the subject of a different article though.
michel.dechesne
Michel.dechesne - 1 year ago
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?
batbeer2
Batbeer2 premium member - 1 year ago
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.
portfolio14
Portfolio14 - 1 year ago
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.)

batbeer2
Batbeer2 premium member - 1 year ago
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. http://www.pbs.org/wnet/need-to-know/five-things/the-u-s-postal-service/11433/ 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.

http://www.downsizinggovernment.org/usps
silviocast
Silviocast premium member - 1 year ago
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.

batbeer2
Batbeer2 premium member - 1 year ago
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.
batbeer2
Batbeer2 premium member - 1 year ago
By the way, it seems I missed an important risk:_[www.guardian.co.uk]

Fake stamps.
silviocast
Silviocast premium member - 1 year ago
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

silviocast
Silviocast premium member - 1 year ago
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.]

batbeer2
Batbeer2 premium member - 1 year ago
>> 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...)
swnyc2
Swnyc2 - 1 year ago
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....
batbeer2
Batbeer2 premium member - 1 year ago
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.
portfolio14
Portfolio14 - 1 year ago
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.

batbeer2
Batbeer2 premium member - 1 year ago
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.
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

What happens if interest rates go up and the pension plan becomes overfunded? Does PostNL get the money back?
swnyc2
Swnyc2 - 1 year ago
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?
portfolio14
Portfolio14 - 1 year ago
@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.
portfolio14
Portfolio14 - 1 year ago
@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?

batbeer2
Batbeer2 premium member - 1 year ago
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.
portfolio14
Portfolio14 - 1 year ago
Thanks Batbeer2!

batbeer2
Batbeer2 premium member - 1 year ago
Hi Swnyc,

>> 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.

I have looked a bit more at TNT. The business doesn't inspire me enough to dedicate an article to that one. Nevertheless, here are some thoughts:

1) I believe the company doesn't have a long-term strategy. They're just setting themselves up for a sale and subsequent break-up. You can see it by their actions and also the prior jobs of the current CEO.

2) Like DHL and UPS, they have big international market share in EU. This basically rules out DHL and UPS as buyers for anti-trust reasons. It leaves Fedex, Kuhne & Nagel, DPD (French post) and Royal mail as potential buyers.

In fact, Fedex drove the last nail into the coffin of the UPS deal by refusing to buy some of the assets from UPS after the deal. That would have given Fedex enough market share to leave 3 major players in EU. That would have appeased the regulators. Fedex pulled the plug on that deal.

3) Like Fedex, TNT has (had) significant market share in Brazil. TNT is leaving Brazil.... this makes them an easier target for Fedex.

4) They are leaving China.... where both Fedex and UPS have big share of market already. Now, an acquirer doesn't have to deal with regulatory issues in China or Brazil.

Given all this, I think of TNT as a speculative acquisition play. That's not my cup of tea.

My guess is a bid will come within 2 years. If it does, it will have been well-prepared and will be very likely to close. It will also probably be a bit lower than the UPS bid and a bit higher than current prices. Interestingly, Mason Hawkins owns both Fedex and TNT.

http://www.supplychainmovement.com/whats-next-for-tnt-express/
batbeer2
Batbeer2 premium member - 1 year ago
Since I wrote this:

- Belgium has IPOed its postal service (market cap = $4B) and

- the UK is planning to IPO Royal mail in a few weeks (expected market cap of $4B)

- The pension fund of PostNL has performed reasonably well.

- The parcels division and international division have performed very well.

BPOST is interesting. It has a better balance sheet than PostNL but is still controlled (51%) by government. Also, parcels are a much smaller part of revenue than at PostNL. On the other hand, postal volumes in Belgium have declined at a lower rate in recent years.

I expect the decline of postal volumes in Belgium to accelerate in coming years. I believe Dutch banks and (local) governments are leaders in the digitalization of their communication with customers/residents. Other countries in the region will follow that path.

As for Royal mail..... it's a mess. The company doesn't own its post offices. This of course is a major competitive (dis)advantage. Then there's Scotland. They seem to have their own ideas about a universal postal service and are not amused by government in London deciding what's going to happen. In Scotland, they like to think they're independent.

IMHO Royal mail is going to face some major problems in coming years. PostNL, DPD and/or DHL may be able to take advantage. PostNL has been growing in the southeast of the UK.

Oh yes.... and the stock has come up a bit. It's now at roughly 5x my estimate of current owner earnings. Less if you back-out the market value of the TNT shares. At $4, this is still cheap.
swnyc2
Swnyc2 - 1 year ago
Batbeer2,

Thanks for the update.

You have a gift for understatement ("come up a bit"). It's up more than 70% from where I got in.

Thank you for drawing my attention to the company.

I was wondering if you had any thoughts as to why the stock has appreciated so much so quickly?

Regards,

batbeer2
Batbeer2 premium member - 1 year ago
>> I was wondering if you had any thoughts as to why the stock has appreciated so much so quickly?

I don't know.

1) My best guess is that the investment community is now willing to believe the pension liabilities are not going to bankrupt the company. At the time of writing, that was seen as a near-term risk.

The pension fund has subsequently made some positive noises about coverage ratios. The downward march of interest rates seems to have stopped. Low interest rates are bad for PostNL's pension fund but steadily decreasing interest rates are disastrous. Now we're back to just bad.

Those reading the fine print will have noticed that for the first time ever, employees themselves will be contributing to the fund out of their gross income. This wasn't accounted for by analysts in earlier estimates of FY 2013 and FY 2014 earnings. For good reason. It wasn't knowable at the time.

What was first a cost (pension contributions) is now a source of income (employees are helping fund the deficit). I'm not going to crunch the numbers on that but I'm sure analysts are adjusting their models accordingly. It is what they do best. I mean it. Analysts are not dumb. The problem they have is that they're expected to predict the future. They don't have crystal balls though (they usually don't have balls of steel either).

2) Management has been talking about reinstating the dividends.... under the right conditions of course. That talk has probably had an effect on the stock.

3) At the time of writing, a significant number of merger arbitrage players were probably dumping the stock with no regard to the value. That created some downward pressure that is no longer there.

4) An experienced Dutch investor I know who owns the stock pointed out that PostNL will be canceling their legacy stamps in a few months. Until now, you could still use some stamps from pre-euro times. Those old but unused stamps still existed as a liability on the balance sheet. If memory serves, that was a liability of roughly 100m. Though the liability wasn't very real, writing it down to zero will have a positive effect on the balance sheet as reported. They may even run it through the earnings statement for all I know. This has generated some noise in the media.
batbeer2
Batbeer2 premium member - 1 year ago
PostNL announced today that it has renegotiated its pension liabilities.

- Retirement age is raised to 67.

- Company's liabilities are now maximized.

- Pension funds of PostNL and TNT are split.

I think the market is under reacting to this news. This agreement has a big impact on the risk and value of the stock. I also think it will have an impact on reported earnings.
swnyc2
Swnyc2 - 1 year ago
Thank you for recommending it -- it's almost doubled since your article. I wish I had bought more....

:)

batbeer2
Batbeer2 premium member - 1 year ago
So do I :o)

BTW... I think it's still stupid cheap.
batbeer2
Batbeer2 premium member - 1 year ago
BINGO

PostNL has doubled; at least in dollar terms.

On May 22, PNLYY closed at .36.

On Oct 22, the stock closed at $4.86.

Part of the gain has come from the fact that the euro has appreciated against the dollar.

In euros the stock has gained just (3.50-1.86)/1.86 = 88%


Ever hopeful, I'm still cheering along A.H. Belo, Nam Tai and Legg Mason.
cdubey
Cdubey - 1 year ago
Ok, now you should accept the congratulations. It also doubled in Euro. I bought at 1.85 and it now sells for 3.87. I have 2% of my portfolio in it, so it was not a big position per say. But hey, I am not complaining. :)
gurufocus
Gurufocus premium member - 1 year ago
Congratulations! You will get your reward of $1000.
batbeer2
Batbeer2 premium member - 1 year ago
@Cdubey

Thanks!

Maybe you leave it and it grows to 5% ?

KPN is all over the place. Maybe I should have another look at that one.

I'll let you know if I find something interesting.

cdubey
Cdubey - 1 year ago
Congratulations for the $1000 reward. That is $1000 return on $0 investment (well, apart from time invested).
batbeer2
Batbeer2 premium member - 1 year ago
PostNL is selling half its stake in TNT (half of 30%) to shore up its balance sheet.

Anyone still interested in this stock may want to check out the annual report to find out under what conditions the company will reinstate its dividend.

In any case, this development renders the original thesis invalid.... PostNL is flying off my radar.

I pass the baton to McDuck Capital over at SA.
batbeer2
Batbeer2 premium member - 9 months ago

Hmm.....

PostNL comes crahing back onto my radar today. I don't think the news is bad enough to warrant a 20% drop. If it drops even more it may become worthwile to dig into the numbers once again to see what's going on with the cash (possibility of a reinstated dividend depending on the debt to equity ratio).

I'll have to wait and see if the guys and gals over at SA hand me back the baton.

batbeer2
Batbeer2 premium member - 2 months ago

PostNL plans to raise the price of stamps from 64 to 69 cents. The new rates will kick in from january 1st 2015 and have been OKed by regulators.

On one hand the hike will be after the christmas season but on the other hand many consumers will be loading up on "cheap" stamps before yearend. That should be good for cash flow.

Since last year, PostNL prints stamps that do not show the price on the stamp itself. This means the company doesn't have to print/design new stamps if and when it raises prices. They simply sell the same stamp at a higher price.

Also, last month PostNL closed the last of its "old" distribution centers. Since they cut the dividend, the company has used some of the retained cash to revamp their distribution network. The new system is geared more towards packages and a bit less towards plain old letters. In any case, the logistics of both processes are now more integrated. Capex should drop off a bit going forward.

When the dividend was cut last year, management said they would reinstate it after dealing with the pension deficit and investing in the core infrastructure of the company. As far as I can tell, they are on track to do precisely what they said they would do.

All this is from my local newspaper but can probably be verified with a little googling.

IMHO the current price of the stock does not reflect these developments. The stock currently trades at roughly 4-6 x my estimate of owner earnings.

On top of that they still own a significant stake (15%) of TNT Express.

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