A safe proxy to play the Covid-19 vaccine cold chain and e-commerce boom in the New Normal
For anyone wanting a slice of the growing global logistics action as vaccine distribution becomes the focus of governments everywhere, look no further than Deutsche Borse listed-Deutsche Post which operates under the trade name Deutsche Post DHL Group DHL Group (DPDHL). DHL, its most famous brand is in the official nomenclature, needs little or no introduction. It is the world’s premier, and some say, largest logistics operator.
Officially, DPDHL operates two brands: DHL offers everything that has to do with logistics: A comprehensive range of parcel and international express service, freight transport, supply chain management services, along with e-commerce logistics solutions. As for Deutsche Post, it is Europe’s leading postal and parcel service provider.
DPDHL’s business is organised into five operating divisions, where each is managed by its own headquarters and subdivided into functions, business units and regions for reporting. The first division is Post & Parcel Germany (PPG), which is operated by both Deutsche Post and DHL. PPG is the largest postal service company in Europe, and offers services such as mail communication, parcel logistics, dialogue marketing, international mail and press services. PPG contributes roughly 23% of DPDHL’s revenue, based on the last reported quarter. The second and largest division is DHL Express, which includes transportation of goods and documents that are time-sensitive from door-to-door. The main product of DHL Express is Time Definite International (TDI), which enables delivery at predefined times through its global air freight network operated by multiple airlines. DHL Express contributes roughly 30% of the DPDHL group’s revenue.
The next division is DHL Global Forwarding and Freight (DGFF), which specialises in brokering air and ocean freight services, inroad freight, and comprehensive transport solutions. DHL is the largest company in air freight and ranked second in ocean freight in terms of volume transported. This division contributes roughly 22% of the group’s revenue based on the last reported quarter. The fourth division is DHL Supply Chain (DSL), which manages supply chains of customers that includes warehousing, transport as well as value-added services. DHL is the global market leader in contract logistics with the largest market share and operations in over 50 countries. This division contributes roughly 18% of DPDHL’s revenue. The last division is DHL eCommerce Solutions (DeCS), which provides domestic and international parcel services for business customers and consumers, as well as individual services and tailored solutions for e-commerce businesses. This is the smallest division of the DPDHL group, with a revenue contribution of roughly 7% in the last reported quarter.
Our case for DPDHL is that it is a well established company with solid fundamentals in an industry that sees high demand. Firstly, the business covers a large part of the value chain — and it is the leader in terms of size in most of its operating divisions. We think that scale is important, and being able to provide a variety of services along the logistics value chain is key in developing a brand name and building a competitive moat. The business divisions inherently have specific advantages and individually contributes to DPDHL’s growth prospects over the near and medium term.
DHL Express, for example, is expected to benefit from cross-border e-commerce as well as the growing importance of small- and medium-sized enterprises in the e-commerce segment as it covers this client base. The DHL Global Forwarding and Freight division is asset-light relative to other divisions, which allows it to offer efficient routing and a multimodal transport without denting the companies operating expenses.
For DPDHL’s Supply Chain division, it continues to automate and digitalise the supply chain of its customers through flexible automation technologies such as wearable devices and collaborative robotics, which ultimately increases the efficiency of the business.
The recovering business-to-business (B2B) market with the recent vaccination rollouts is expected to positively impact DPDHL, as the importance of logistics and transportation will rise in volume. Generally, B2B carries higher margin than business-to-consumer (B2C) deliveries, hence margins for DPDHL should improve over the near term.
For its preliminary 4QFY2020 ended Dec 31, 2020, DPDHL reported an excellent set of results. The group’s revenue was up 13% y-o-y, while its Ebit grew 56% compared to the previous year’s quarter. The largest contributor to the earnings was the DHL Express division, with Ebit growing 70% for the same period. Free cash flow for FY2020 almost trebled compared to the previous year, indicating the strong profitability of the company, and was mostly driven by structural e-commerce growth due the pandemic. DPDHL is also well positioned to capitalise from the rollout of vaccines, as it is a key player in global vaccine logistics. Guidance for the upcoming periods and year from management for DPDHL’s earnings and free cash flow was also raised, reflecting the company’s confidence in its near to medium-term prospects.
Over the past seven years, the company’s financials have seen stable and consistent growth, particularly its operating and free cash flow. In terms of yields, the company is significantly attractive compared to the negative German risk-free-rate. The earnings, operating cash flow, free cash flow and dividend yields are 4.9%, 13.2%, 8.2% and 3.0% respectively. Short-term liquidity of the company is decent with a current ratio of 0.9 times and quick ratio of 0.7 times. Solvency-wise, though the company has a debt-to-equity ratio of 120.1%, its interest coverage ratio of six times is more than enough to ensure that it does not go under. In fact, given the government owns 20% of the company, it can afford to have higher than average debt levels. Chart 1 illustrates revenue and Ebit contributions of each of DPDHL’s operating divisions.
Analysts have given a target price of EUR47.07 ($75.57), which offers 11.5% upside potential from its current trading price of EUR42.22. Our in-house valuation of the company indicates that this company holds at least 15% upside potential over the next 12 months by offering not just value but growth. Solid fundamentals and catalysts from the recovery phase of the pandemic should allow DPDHL to continually post strong financial and business performances over the next few periods.
