POSTNL: Dividend fetishists still not aroused

PostNL reported 3Q11 revenues of € 991m (€ 972m kbcs, € 994m css), EBIT of € 66m (€ 49m kbcs), Underlying EBIT of € 70m (€ 60m kbcs, € 56m css) and Underlying Cash EBIT of € 21m (- € 3m kbcs). Adjusted net profit came in at € 27m (€ 23m) and was negatively impacted by a higher effective tax rate caused by prior year adjustments and irrecoverable losses for which no deferred tax asset could be recognized.

Mail in NL underlying EBIT came in at € 17m (€ 31m kbcs, € 19m css) but performed better than expected (€ 33m), when adjusting for the difference between the recorded IFRS employer pension expense for the defined benefit pension plans and the actual cash payments received from other segments. Parcels reported underlying EBIT of € 16m (€ 16m kbcs, € 15m css), and International came in at € 4m (-5m kbcs, € 0m css). Mail Other finally reported an underlying EBIT number of € 33m (€ 18m kbcs, € 17m css), and adjusting for the items as noted for Mail in NL, the comparable number was € 15m. On Underlying Cash EBIT, Mail in NL (€ 0m vs. € 0m kbcs) and Parcels (€ 17m vs. € 16m kbcs) were in-line, while both International (€ 4m vs. - € 5m kbcs) and Mail Other (€ 0m vs. - € 14m kbcs) came in better than forecasted.

Dividend policy confirmed, but no longer in cash:
PostNL remains committed to its dividend policy (75% of underlying net cash income with minimum of € 150m p.a), and intends to distribute its dividend in shares only until consolidated equity is positive AND they have certainty of a BBB+ / Baa1 rating. As stated in our 3rd quarter preview we believed that a change in accounting principles in corporate financial statements of PostNL NV from Dutch GAAP to EU-IFRS should result in a positive equity impact. Management indeed notes that even upon the adaption of IAS19 in 2013 (around € 1bn negative impact) it expects equity in the corporate financial statements to remain positive. However, taking into account the net debt position of € 1,053m (€ 1,041m kbcs) end 3Q11, the current TNT Express share price level (€ 5.3/sh) and pension coverage ratio of 96% vs. 105% required (€ 468m deficit), PostNL’s long term credit rating aim of BBB+ / Baa1 could be endangered. This should impact the company’s appetite in paying out a cash dividend.

Conclusion:
Overall results came in better than expected (underlying EBIT € 70m vs. € 60m kbcs, € 56m css and underlying Cash EBIT € 21m vs. -€ 3 kbcs). Management for the second time in a row lifts guidance, and now expects FY11 underlying EBIT to come in ahead of € 130-170m (€ 166m kbcs old). On the other hand, even though the dividend strategy is retained, the company will look into distributing the dividend in shares until consolidated equity is positive AND they have certainty of a BBB+ / Baa1 rating. Under current circumstances we don't expect the company to switch to a cash dividend soon, which should not arouse the dividend fetishists. We stick to our Hold rating and € 4.4/sh TP.