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TNT Express - Getting their head around in tough markets

TNT Express - Getting their head around in tough markets

24.7.2013 9:26

Post UPS’ profit warning, citing overcapacity in the global air freight market, increasing customer preference for lower-yielding shipping solutions, and a slowing US industrial economy driving revenue and operating profit below expectations, and also Fedex (106,79 USD, -0,89%) flagging weakness in its International activities, we are heading increasingly conservative into 2Q13 (results due on 29 July before market). We expect the focus mainly to be on margins as we expect volume evolution to remain fairly reasonable, but the pricing environment having an adverse impact.

End markets moving at different speeds:
Automotive & Industrial exposed companies (45% of revenues) showed a mixed bag with European car sales at their lowest level in 17 years and the European industry still not in its best shape. High-Tech sector (25% of revenues) bellwethers like Intel (22,75 USD, -0,09%) and Microsoft (31,82 USD, -0,59%) saw their revenues come under pressure (mainly due to their PC-exposure) while other, tech stocks reported very mixed numbers. Healthcare & Wellness (20% of revenues) and Lifestyle & Other (10% of revenues) are doing fairly well as exemplified by the Philips (23,65 EUR, 0,62%) Q2 results (Consumer Lifestyle) which posted 13% sales growth in the second quarter, mainly supported by double-digit sales growth in growth geographies but also by mid-single-digit growth in Western Europe.

Ongoing pricing / mix pressure impacting margins:
As we expect EMEA volumes to continue to grow it will likely be at a lower price per consignments as a result of the ongoing shift from Express to Economy products and a continued reduction in weight. Although management is executing on its Deliver! Cost savings program, we believe it will take time before we see the first real positive impact on EMEA margins. We consider volume growth across ASPAC to be limited as the focus is on yield with air freight overcapacity putting further pressure on margins.

2Q13 preview:
We expect TNT Express (6,02 EUR, 0,23%) to report 2Q13 group revenues of € 1,744m (including Domestic China) split as € 1,134m EMEA, € 463m AsPac, € 42m Other Americas and € 107m Other networks. Underlying EBIT should come in at € 56m split as € 62m EMEA, € 2m AsPac, € -3m Americas, € 1m Other Networks and € -6m Non-Allocated. We expect Brazil to report an Underlying EBIT loss of € 11m. We see adjusted net profit at € 23m.

A weak macro environment and adverse price and customer mix development (partly structural) continue to weigh on EMEA profitability and hold back an immediate recovery. The 8% EMEA margin goal by 2015 is a reflection of this, despite the € 220m in structural cost savings. Although management could have taken a conservative stance with its 2% sales growth, we believe this is a good reflection of the macro-economic uncertainty. We stick to our Hold rating on TNT Express and € 5.8/sh TP.

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