SINGAPORE (July 22): German 10-year bund yields have spent much of July at -0.24% to -0.26%. For yield seekers, look no further than Deutsche Post, trading as Deutsche Post DHL Group (DPDHL), an interesting company that is trading at a dividend yield of 3.92% (see Chart 1). Its yield spread — the difference between dividend yield and risk-free rates — is more than 4%, given the current negative yield on risk-free bunds. The catch, of course, is tax. For German dividends, investors have to pay a withholding tax of 25%+5.5%.
In Germany, all dividends, regardless of whether they are paid to a resident or a non-resident, are subject to a 25% withholding tax plus a solidarity surcharge of 5.5% of the tax due as a flat tax, unless the shareholder is a European Union resident company that owns 10% or more of the company paying the dividend.
The most interesting part of DPDHL is its ownership of DHL, a global household name and one of the largest global logistics companies. DPDHL is Europe’s leading postal service provider.
DHL offers a comprehensive range of international express, freight transport and supply chain management services, as well as e-commerce logistics solutions. It is a profitable, free-cash-flow-generating, dividend-paying e-commerce play that has growth prospects.
Too good to be true? For Singaporeans, yes, because there is a second catch. While clients of local brokers such as Maybank Kim Eng and UOB Kay Hian can buy and sell European shares, the commission rate is high. For instance, at Maybank KE, the minimum commission for European stocks is €35 ($53.46), and 0.5% for large trades. The cost of buying and selling European shares is even higher at UOB Kay Hian.
Is it worth investing in DPDHL?
Unlike Singapore Post and Pos Malaysia, DPDHL has a presence in the full value chain of a logistics company following its acquisition of DHL International. In 1995, Deutsche Bundepost was privatised and renamed Deutsche Post, with the German government still owning a large stake in it. The company started acquiring a stake in DHL International in 1998. In 2000, the German government sold part of its shares in an IPO, retaining 20.53% of the enlarged company. In 2002, Deutsche Post acquired the remaining shares in DHL it did not own.
DPDHL comprises five divisions, of which only post and parcel (P&P) is not under DHL. DHL’s divisions are, in order of contribution to earnings before interest and taxes (Ebit), DHL Express, DHL global forwarding and freight (DGFF) and DHL supply chain (DSC) for FY2018. Since the beginning of this year, the P&P segment has consisted of post and parcel operations only within Germany, while the group’s international parcel (ex-Germany) and e-commerce businesses — previously DHL Parcel Europe and DHL eCommerce — have been made a standalone division called DHL e-commerce solutions.
DHL and its units are the largest contributors to DPDHL’s Ebit (see Charts 2 and 3).
DHL offers logistics services such as national and international parcel delivery, e-commerce shipping and fulfilment solutions, international express service, and road, air and ocean transport as well as industrial supply chain management. DHL has a presence in 220 countries and territories. No surprise then that it is positioned as “the logistics company for the world”.
DHL Express — the largest division in the company — contributed 61.9% to Ebit in FY2018. It is also the division with which the general public is most familiar. DHL Express transports goods and documents from door to door. Its main product is Time Definite International (TDI), a service with a -pre-defined delivery time. For example, its Medical Express transport solution, which is tailored specifically for customers in the life sciences and healthcare sector, offers various types of thermal packaging for temperature-controlled, chilled and frozen content. Another service, Collect and Return, is used predominantly by customers in high-tech industries: Technical products are collected from the user, taken in for repairs and then returned.
DGFF is a “virtual airline” that comprises several airlines, some of which are wholly-owned by DPDHL.
DSC claims to have 6% of market share. Supply chain comprises warehousing, transport and value-added services and is being boosted globally by the rise of e-commerce. “The contract logistics market is estimated at around €216 billion, with the top 10 players accounting for only around 20% of the total volume. We lead the market in mature regions such as North America and Europe and are well positioned in rapidly growing markets throughout [Asia-Pacific] and Latin America. In Latin America, we have strengthened our presence with the acquisition of the Colombian Suppla Group,” DPDHL says in a statement.
Investing in e-commerce logistics
Traditional postal and mail delivery services are a sunset industry because of digital disruption. The International Post Corporation (IPC) in its 2018 Global Postal Industry Report suggests that a structural industrial shift has resulted in the decline of the core business of mail delivery as communications move online. In addition, there is strong competition from the rapidly growing e-commerce parcel market. Charts 4 and 5 show the historical rise and fall of mail volume, parcel volume and e-commerce. Companies within this industry have also shown increasing investments in e-commerce logistics as the share of mail revenue as part of total industry revenue declines.
DPDHL’s management has guided that Ebit is likely to rise 23.3% to a minimum of €3.9 billion in FY2019 and a further 22% to €5 billion in FY2020 (see table).
For the P&P division, an increase in mail prices, which is expected to be around 10.6%, and parcel prices, particularly for business customers, is expected to boost the company’s Ebit. Further, DPDHL’s moat for its Express division lies in its growing international market share. The company currently has 38% of market share for TDI shipments, the premium segment within the industry.
DPDHL reported a 16.3% increase in Ebit without non-recurring effects from FY2017 to FY2018; management has guided an increase of 9.6% and 12.1% in this figure respectively for FY2019 and FY2020. For 1Q2019, DPDHL’s group revenue increased 4.1% y-o-y, from €14.7 billion to €15.4 billion, driven by organic growth from all five business segments. Ebit grew 28.1% in the same period, from €905 million to €1,159 million, mainly driven by the divestiture of its supply chain unit in China, which resulted in an Ebit gain of €426 million.
Offering value and growth at a reasonable price
Chart 6 shows a relatively wide divergence between DPDHL’s weighted value growth and price growth. The company is undervalued, based on this metric; cash flows (both operating and free cash flow) are the main drivers behind this strong growth in company value.
The margin of safety analysis paints a slightly different picture on the company’s attractiveness.
Although the share price is trading at 14.8 times net tangible assets of €1.99, our in-house valuation of DPDHL utilising the discounted cash flow approach suggests a valuation of €38.29. This assumes a discount rate of 7.4%. The company is currently trading at €29.47. In addition, financial ratios are strong, with the current ratio at 1.01, while its Ebit interest cover stands at 11 times, along with a net gearing of 46.4%.
Unlike Singapore Post, DPDHL has free cash flow; its FCF yield is 6.82%. As for dividend yield, which is what makes the German behemoth attractive to investors, DPDHL has a dividend policy of paying out 40% to 60% of its net profits in the past 10 years. The consensus earnings estimates for FY2019 of €2.65 billion, up 16% y-o-y, and for FY2020 of €3.05 billion, up a further 15%, indicate continued dividend growth.
Property boosts Singapore Post; Pos Malaysia plans turnaround
Singapore Post tried to emulate Deutsche Post DHL Group (DPDHL) by acquiring so-called e-commerce businesses TradeGlobal and Jagged Peak in 2015 and 2016 respectively. It had acquired small logistics businesses such as Quantium Solutions, Couriers Please and Famous over the years, from 2013.
SingPost appears to be somewhat stuck in the 20th century. Post and parcel services and rentals from its retail mall, SingPost Centre, are the two contributors to operating profit, as logistics was still loss-making in FY2019. Margins for post and parcel services remained high at 21.7% in FY2019. The company has been able to maintain margins of over 20% for more than five years.
The company is hoping to divest its e-commerce businesses, which have been impaired, but are still loss-making.
Although SingPost is a long way behind DPDHL, its valuations are not overly rich. According to discounted cash flow and sum-of-the-parts valuation, SingPost is valued at 96 cents. The margin of safety analysis, which discounts assets based on their quality, indicates a fair value of 53 cents; the company’s net asset value (NAV) per share and net tangible assets (NTA) per share are 74 and 60 cents respectively. As a result, SingPost appears to be slightly overvalued, based on its asset quality, as these values are below the stock’s current trading price, denoting that investments might be riskier in terms of safety. However, its current price of $1 almost matches the DCF and SOTP value.
Is SingPost worth buying for the dividend? Could its share price drop further or could dividends be cut? It has been paying out dividends in a payout ratio of between 60% and 80% of underlying profit for each financial year, paid quarterly. Over the years, the company’s net profit and NTA have fallen, owing to losses incurred by and impairments from its e-commerce business. Whether dividends can be maintained would depend on how successfully the parcel business grows (Singapore is a small market) and whether its reworked Southeast Asian and Asia-Pacific strategy works out.
Can Pos Malaysia turn around?
Pos Malaysia has had a difficult five years, with earnings declining. The company’s management attributes this to the structural decline of mail volume. It has stated that it is formulating a strategy for a turnaround. For instance, it expects the government to approve a postage tariff hike in FY2020. Secondly, it hopes to work its logistics assets more and take advantage of the growing e-commerce sector in Malaysia.
For now, the company appears overvalued, based on historic metrics. The fair value of the company, based on this analysis, is RM1.59; its NAV per share is RM2.19 while its NTA is RM1.71. Even if the turnaround does not succeed, investors have a relatively decent margin of safety, assuming a worst-case scenario (if the company decides to wind up or liquidate its assets). Pos Malaysia currently trades at RM1.72.
