Growing macro concerns, indications of a slowdown in EMEA freight demand, and lower-than-expected volumes on the Asia to Europe lines, force us to cut our growth forecasts on TNT Express. Compared to the previous crisis, the ability of Aspac and Americas to compensate is uncertain, as witnessed on the Hong Kong hub, where air cargo volumes handled were down 10% in May, 7% in June, 6% in July and 8% in August. Cargo volumes were down 6% sequentially in August vs. July, with the average pattern being for a sequential decline of only 1% over the same period. (67,68 USD, -2,90%) earlier this month also admitted to a profit warning, mainly on the back of weaker global growth and a softening in volumes going to and coming from Asia.
Margin pressure inevitable
With oil prices holding up quite well, and the possibility of a slowdown in the global economy, customers could continue their shift away from high-yield Air Express and Express Road to Road Economy. We also see a higher risk that the number of multinationals in the mix increases again, which would lead to an adverse overall pricing effect. Although management is guiding for a 10-11% mid-term margin, and ~9% in the short term, we believe hitting this target might prove tricky, given the highly fragmented nature of the European express market and the fact that volume growth is below that of peers.
Upside could come from faster-than-expected Brazil turnaround
The attempt to integrate two recently-acquired businesses in Brazil has raised quality issues: TNT Express had to take a € 120m impairment charge and management’s Brazilian strategy has been called into question. But after intensive efforts, it seems that management now has matters in hand: service quality has stabilized (from 50/60% to 90%), key staffs were re-hired (e.g. former Mercurio management), top clients were secured, and some lost clients are hinting that they could come back in the wake of the busy September/October period. We also understand that there are no more major customer claims outstanding and management re-iterated that it is on track to reach break-even by 2H12.
As a result of the aforementioned, we cut our 2012 and 2013 EPS forecasts by respectively 23% and 12% but leave our 2011 numbers broadly unchanged.
Trading at a P/E 2012 of 14.4x vs peers (UPS / Fedex) at 11.2x and EV/EBIT of 10.2x 2011 and 7.5x 2012 vs peers at 10.9x and 7.9x, there is limited room for upside. But earlier-than-expected breakeven in Brazil and/or China Domestic could have a positive impact on earnings multiples.
Our net TP is € 6.7/sh (from 8.2), based on the average of a DCF (WACC 9.5%, terminal margin 6.5%) and a blended multiple exercise (7.0x EV/EBIT 2012 EMEA, 0.3 x Sales Aspac/Americas). The macro-environment is very fragile and markets remain volatile, hence we believe this is not the right time to own a cyclical stock like TNT Express. Hold rating maintained.