Brazil - clear commitment from management towards turnaround
After the losses booked over the last quarters, and impairments taken during 1Q11 of € 120m, Brazil is no longer managed by a separate region manager but reports directly to the CEO, Mrs. Lombard. Brazilian issues came to light over the last 9 months when trying to integrate the two acquired companies Mercurio (2007) and Aracatuba (2009). This resulted in a loss of key staff, bad quality and a loss of clients with resulting claims. The CEO seems to blame herself for being too occupied with the demerger and says being personally committed to turnaround Brazil and to make it break even by 2H12 at the latest. She will fly to Brazil every 6 weeks and visit clients and depots. One of the targets is also to win back one large lost client. Furthermore, the former owner of Mercurio is re-hired to help getting Brazil back on the rails.
Upbeat presentation on ASPAC
(16,32 EUR, -0,09%) sees growth in Asia International at 15-20%. It claims the leading position in Express between China and Europe. Furthermore, Express is also the leader in Domestic Chinawith the largest geographical coverage (80% of China GDP). While the International activities are making some profit (low single digit) Domestic Express is still loss making and should turn profitable by 2013. Express is currently implementing Day Definite and track and trace services to complement the L-t-L (Less than truck Load) activities. International Express will also profit since multinational clients can be increasingly linked to the local dense network. We are quite optimistic about the presentation on ASPAC, although acknowledge that it will take some time to see real profits while there is also some uncertainty on turning the L-t-L activities into a Day Definite offering.
Guidance re-iterated, or not
We didn’t spot any big changes from the guidance communicated early April post the express profit warning. However management couldn’t confirm the absolute 2015 express goals expressed during the CMD in December last year (€ 900-1,000m EBIT). Mid term guidance is now calling for a 10-11% margin for EMEA which compares to 9% over 2010 and the 2007 peak of 12.8%. Base price increases and (fuel/security) surcharges, product and customer mix initiatives together with ongoing efficiencies and volume leverage should lead to this goal. The fragmented European market and increased competition from ( EUR, 0,00%) and ( EUR, 0,00%) across Europe together with domestic postal groups focusing more on express are still some reasons of concern.
Hold rating confirmed
There remain quite some uncertainties regarding the Express activities (Brazil, fragmented European market, first profits from China) while the CMD didn’t really reveal new items. We will build new models on Express and Post NL post their respective capital market days. For now we stick to our Hold rating.