Today we initiate coverage on Express with a Hold rating and € 9.6/sh TP. This compares to yesterdays closing price (as-if-and-when-issued) of € 9.45/sh. The settlement of trades on first trading date and first date of irrevocable trading is set on 31 May 2011.
Brazil – we expect the turnaround to be successful
We don’t believe the Express operations are structurally impaired, but acknowledge that management has to restore confidence after a horrific performance in Brazil. CEO Lombard 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. One of the targets is also to win back one large lost client while the former owner of Mercurio is re-hired to help getting Brazil back on the rails. Given the firm commitment by top management and the importance of Brazil to Express’ story, investors for now will need to give management the benefit of the doubt, although a firm contribution to earnings is not expected before 2013, so we rather see upside than downside risk.
ASPAC – turning Domestic China into a day-definite service
The issues in Brazil have also to some part put in question the Domestic Chinese activities, which tries to transform from a LTC to a day-definite service. This will be a lengthy and intensive process and will again require patience of investors, who should be able to reap the fruits post 2013 once Domestic China is set to reach break-even. We have taken a somewhat conservative stance on ASPAC given the challenge it will face to make Domestic China a day-definite market, and our FY14 EBIT margin of 2.0% compares to a >10% margin in EMEA. We believe especially China to be key to TNT’s strategy to connect the different emerging regions (Latam, Asia) to Europe, banking on the growing Asia-Europe Express business coming from TNT’s multinational clients. Our assumptions for ASPAC (Australia, Domestic China, International …) are for revenues growth of >10% 2011-15.
EMEA – fragmented market makes yield improvement a challenge
In Europe, the market is highly fragmented (top 5 holds 55% of the market vs. top 2 holding ~90% in the US) and it proves challenging to improve yield. and are furthermore growing their market share organically and domestic competition is fierce. High oil prices should support volumes in the Economic Express segment although come at lower price, and could have a further deteriorating effect on yield. We expect to grow EMEA volumes at 4-5% 2010-15 and will post a margin of 10.3% in 2015 vs. 9.0% over 2010. This margin compares to the targeted 10-11% of Express.
Valuation – Hold rating and TP of € 9.6/sh (€ 9.45/sh)
We value Express at € 9.6/sh on 7.5x EV/EBITDA 2012 cross checked with our DCF which point towards a fair value of € 9.8/sh. We see as an EV/EBITDA of 7.5x as an appropriate 1-year forward multiple, which is somewhat ahead of the average of and , reflecting ASPAC and Americas for which the contribution to earnings is rather dilutive at this point in time. At our TP Express would trade on a P/E 12 of 20x.