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).
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.
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
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.
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.
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.
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.
Five years of financials of PostNL. Other sources include the results of (now demerged) TNT.
European postal services
Developments in the Dutch postal market
Good discussion at oddballstocks (2011)
PostNL dividend policy