PostNL spinoff opportunity in the parent

PostNL (PNL.Netherlands, TNTFF)

Price: €3.21 (10/13/11 intraday)

This company might sound familiar to readers, I discussed the divested division a few months back with a post on TNT Express.  Let me back up a minute, up until May of this year there was a Dutch company TNT which operated express shipping and local delivery of parcels and mail.  Mail delivery was in the Netherlands, parcel delivery in Germany, Italy, Netherlands and UK, and Express delivery worldwide.  At the end of May Express was spun out which PostNL retained a 30% stake.  PostNL is the non-express local mail/parcel delivery in the Netherlands.

The reason that TNT Express was spun off was that Express and PostNL had grown into two different businesses, one struggling with growth, the other decline.  The directors realized this and split the companies, as the company itself states Express is now a growth stock and PostNL a value stock.  PostNL has been hit by selling due to European fears, in addition they've been hit with selling as investors dump their shares in a seemingly dead or declining business.

I first want to look at the volume decline assumption that PostNL will experience such a precipitous drop in mail that they'll go bankrupt.  While this is possible I don't think it's probable.  PostNL expects mail volumes to drop in the mid single digits over the next three years, and in the low single digits five years out.  Coupled with the decline in mail volume they are estimating an increase in both parcels and international mail.  All of these numbers together volume estimates are running break even for the next three years, and slowly growing five years out.

It's important to note that the volume estimates are provided by the company itself, and naturally they are optimistic.  What's also important to realize is the estimates were made this summer when Europe was in the same financial uncertainty that they're currently in, which gives creedence to the fact that the volume estimates might be somewhat accurate or at least not wildly optimistic.

Value Proposition

The thesis for this investment is really very simple and I don't feel it needs to be broken down in a lot of excel files or charts.

TNT Express has a market cap of €2.808b and PostNL a market cap of €1.286b.  PostNL owns 29.9% of Express, so if we back out that value we are left with the market valuing the business of PostNL for €446m.  Let me break down how low of a valuation this is, PostNL earned €120m in net income in Q1 of this year on a 8% slide in post volume.  They had €84m in operating cash flow in the first quarter alone!  In Q2 they experienced a loss and operating cash flow for the half year was at €69m.  The loss in Q2 was due to a writedown in the value of the Express asset.  The company expects to have €170m in cash operating income at the year end, giving the company a 2.62x multiple of business to cash operating income.

In addition the company plans to pay out €150m a year in dividends which is currently a 11.6% dividend yield.  If we assume the yield is only on the PostNL business it's more like a 33% yield.

The Risks

So what are the risks?  There are a few, and I'll try to talk through each.

The first risk is that the Express holding will continue to be marked down impairing the profits of PostNL.  I think this is one of the bigger risks that has market participants wary.  A writedown will depress net income, but cash flow is unaffected.  In my analysis above I looked at what the value of Express is today, not the book value, so we've already accounted for any sort of writedown.  I don't think this aspect is that big of a deal.  Stand alone Express is already trading below book value, and looks cheap, I highly doubt the company is worthless.

The second risk is the decline in volumes I mentioned earlier.  This is truly the biggest risk for an equity investor, if volumes continue to slide 8% YoY eventually fixed cost will loom large and PostNL won't be able to service their debt and will become bankrupt.  The current view is that mail is dead or close to dead and this death will kill PostNL slowly as volumes drop.  While this is a valid view PostNL is working on growing parcel service in Germany, UK, and Italy and parcel volume is growing.  To counter act the mail volume dropping PostNL has been downsizing operations to pace with the volume decline.  As mail volume has been declining expenses related to mail volume has been declining as well.

The next risk is the pension, PostNL has a nice sized pension plan which will require €125m in contributions in 2011 alone.  The pension is currently 112% funded which isn't much of a concern, the concern is that the contribution amount can be viewed as a fixed debt payment.  PostNL needs to continue paying €125m each year or the pension will become unfunded and will be a liability in front of equity holders.

The last risk is the European risk, which is that somehow with Greek or Portuguese defaults people will stop buying from Amazon, stop receiving birthday cards in the mail, and life in general will completely stop.  I know I'm minimizing some, but defaults or not PostNL will continue to operate, and in this rough environment so far they've been executing at an acceptable level already.  I think this is a risk in the sense that no one knows the outcome, but at the same time this is the reason we're presented with such an investment opportunity.

Here is a link to the latest half year results which include the financial statements: HY and Q2 results

Talk to Nate about PostNL or TNT Express

Disclosure: Long TNT Express, considering a position in PostNL


  1. Hi Nate,

    I agree on the surface PostNL looks cheap based on cash flow to market cap ratio. However a few concerns I have:

    - There is little margin of safety from the asset side at this price. It's trading at a bit more than 2x book value. In a worst case scenario of going bankrupt liquidiation value will be a lot closer to book value than to its current price, imho.
    - The operating cash flow margin is only 3%, so any adverse changes can quickly translate into negative cash flows.
    - The operating cash flow you mention is excluding the investment in PPE, so actual free cash flow is even lower (with an even smaller margin).
    - The dividend looks sweet, but based on the H1 figures the 44 million in dividends means that it is only about 1.5x covered by operating cash flow, an unsustainable level I guess.

    Would love to hear your comments :)


  2. Philip,

    Thanks for the great comments you really hit some items I was thinking about further before purchasing. As I typed this post up I wrote down on a pad next to my computer two questions "What is my margin of safety" and "What could go wrong, and what's the result?".

    My two questions are mostly answered by what you outlined, the asset value isn't that strong, and is even weaker if the Express equity holding is stripped out.

    The other aspect is while cash flow is strong there is a slim margin over the debt and dividend. Basically all of the cash flow is used in three things, dividend, debt, and capex.

    I still need to think through this more, maybe a future post. Even with these issues the price might be low enough to compensate.


  3. Nate,

    Always read your articles with interest, but this is first time that I actually react. As I'm Dutch, I just had to react..;-)

    I agree with your analysis as the cashflow/marketcap is very low. also need to take in account the enormous debt position that PostNL inherited from TNT. The 29,9% stake in TNT Express was done in order to leave PostNL with a positive equity position. Unfortunately this was based on a market price of around €10, which was the opening price of TNT express. Now they actually have a a negative equity position prohibiting them from issuing a dividend.

    On a positive they still have considerable properties (their own buildings) they can sell off and PostNL was allowed by Dutch court to execute their hefty reorganization.

    The most interesting thing is that the CEO formally confirmed that the dividend is cumulative. So if they are prohibited from paying a dividend (due to a negative equity position) this will be added with the future dividend payments.

    PostNL is still too uncertain for me, but I'm still doing my due diligence.

    If I can be of any help, let me know,



  4. Sjoerd,

    Thanks for the comment, the insight from the Netherlands is great.

    When I was reading the filings there was a comment that said they would pay a dividend if their share capital allowed it, and your comment about the TNT stake clarifies it a bit. This is a very important point and it highlights why a write down would be bad. If the equity is written down they would be in a negative equity position (right now they have roughtly 500m of equity) and according to their charter wouldn't be able to pay a dividend.

    When I was looking at this I minimized an equity write down because it's a non-cash item and doesn't affect operations. But if a write down eliminates the dividend that would be a great reason for the drop in the stock.

    I was originally leaning positive on PostNL, but now after your comment and Philip's comment I'm really re-considering. The stock is low now, but if the dividend is post-poned until the Express stock rises I can see PostNL cratering.

    Thanks again for the comment, it was really helpful.


  5. Another few things to consider:
    -the dutch post was recently deregulated so it's unclear to what extent you can even use historical data to model financials. PostNL are already attributing some of the latest results (like pricing pressure) to the new competition from the likes of DHL
    -the biggest risk in this investment (which you don't mention) is the euro currency. No one knows where it will go, but a move there can wipe out any margin of safety (which isn't big here to begin with) in a few days
    -post volumes are plunging even from the 2009 crisis levels. Fact is, most physical mail (not parcels) is not necessary and can be sent via email

  6. Thanks for the comment, I agree with your assessments #1 and #3.

    I don't think the Euro is really a risk that needs to be called out. Currency risk exists in every investment, it's just with international stocks it's a bit more visible. If the Euro craters to say parity a position with the dollar PostNL would be worth less in dollar terms, yet at the same time a US company with European sales/operations would be hit just as hard, the loss would be in earnings not on the brokerage statement.

  7. I haven't taken a look at TNT Express, but am long Cisco & happy with the purchase.

    It's trading perhaps closer to a 35-40% discount (as opposed to your 25% discount comment) and still growing modestly. They can't help but make money with those margins & legacy contracts, so I'll ride out this Wall Street 'uncertainty shitstorm'. Overall should work out pretty well. Took my positions with long-dated options (the volatility is cheap on this one).

  8. schn1ck,

    Thanks for the comment, I think you're referring to the Addvantage post.

    I think Cisco is cheap, you're probably right the discount is more than 25%. I have a lot of bias against Cisco but do own Intel shares. I think Intel's moat is a little bigger, but both are down and out tech companies.

    I think you'll do really well with the long dated options, they're cheap and you're leveraged.

  9. Thanks for the work Nate but I think the biggest thing with the investment is no longer the dividend, since it is just scrip but actually the balance sheet. Have you ever looked at their debt?

  10. Hi Nate,

    Thanks for posting these blog posts, they are very interesting reads for someone who wants to learn to invest.

    On the risk of coming over as captain hindsight :), the construction of the demerger was made to prepare a sale of TNT Express to one of its competitors (hence they shipped all the debt over to PostNL). With the refused offer of UPS in February, the stock has attained +- the same level as when it first came out in May 2011. I doubt there is a chance of it increasing in the near future:

    - UPS has indicated that their next offer will be marginally higher (reuters)
    - Current board of directors want to continue by themselves (there exists a sentimental feeling that Holland has already lost quite a lot of their former glories to foreign companies), however activist shareholders (hedge fund owning 5%) are trying to enforce a sale (by proposing their people to become members of the board, will be decided on their next annual meeting) since the results have became weaker and weaker (their Asian-Europe line has been a failure resulting in the sale of their planes)
    - The former mother, now PostNL, came into trouble since their pension liabilities are linked to the share price of TNT Express, since it tumbled down, they triggered impairments which hurt PostNL, hence they are more open now to the idea of a sale.

    If you got in TNT Express at €4, I reckon you'll get a decent return at current market prices.

    1. Chris,

      Thanks for the comment, I agree on all your points. I got into TNT Express at €6 and sold slightly above €9 so I had a better than 50% gain in less than a year, a result I'm happy with. I wanted to average down when it dropped to the €4s, but I never pulled the trigger.

      Management is stubborn and needs to be booted, it wouldn't surprise me if they turn down the merger and drive the company into the ground. I seriously underestimated them when I first looked at the company.

      I never ended up investing in PostNL because the margin of safety just didn't exist. I dodged a train-wreck.