After TNT Express’ 3Q11 result release, we have listened in to its conference call, and have slightly adjusted our FY12 and FY13 eps forecasts, while lowering our FY11 eps on the back of higher taxes.
Feedback conference call:
Management sounded optimistic on the turnaround of the Brazilian activities and expects it can reach a break level by 2H12. We think the 4Q11 value assessment to turn out positive. In the short term Brazil should remain loss making thoughgiven the lack of scale and a seasonal weaker period ahead. Operationally most issues have been resolved (depots, IT integration, head office, on time delivery, lower claims), and winning back revenues is now the priority.
Domestic China is on track to be profitable by 2013 and the Day Definite service now represents 23% of turnover (21Q 2Q11; 13% 3Q10). The main issues are witnessed at the Intercontinental activities. Lower Asia-to-Europe volume evolution (avg. consignments per day -3.2%) resulted in overcapacity, and after peak season (early 2012) management is looking to take out possibly 2 out of 4 aircrafts. This should bode well for profitability moving into 2012.
Management continues to believe a 10-11% EBIT margin is achievable in EMEA over the mid term (10% 2008; 7.9% 2009; 9% 2010; 8-9% guided 2010) and it will increase focus on International Economy, since more clients are asking for this product. They are currently rethinking their strategy in Europe, but will continue to focus on their strong road network, while lifting prices in International Economy, and lower pricing in International Express. In EMEA there are 2 scenarios for 2012 on the table, one being modest growth, the other being flat to declining revenues performance. Management is currently pro-actively assessing ways to adjust costs where necessary. As a rule of thumb we should take into account that for each € 100m in revenues lost, EBIT should decline by € 20m, or a 20% conversion. Their goal is to protect this or to do better. Indirect costs savings worth € 50m are underway (20m annualized 2011 to be realized, so most effect on 2012).
No real new items were brought to light during the call, but we were left with the impression that management is on top of matters. We believe the confidence by management on its break even goals for Domestic China, and Brazil is credible, while they are pro-actively tackling EMEA and Intercont. Asia with cost cutting measures. This should limit further downside to consensus, at least if the macro environment doesn’t worsen materially.
We lower our adjusted FY11 eps forecast by 10% and lift our FY12 and FY13 eps numbers by 1%, and 3% respectively. We now expect the company to book eps of € 0.17/sh, 0.34 and 0.52 over 2011-13. We stick to our Hold rating and € 6.4/sh TP. We don't expect the end markets for TNT Express to pick up in the near term; with further risk would the macro-economic environment worsen.