Compelling dividend play; proceeds from TNT Express stake to unlock value; reiterate 'outperform' rating with €5.50 price target
16 July 2012
We believe UPS's acquisition of TNT Express at a price of €9.50 per share will be successful with some remedies (e.g. divestment in certain markets). It will provide PostNL (29.9% stake in TNT Express worth €1.5bn) with both the equity and balance sheet to resume a minimum €150m cash dividend payment (12% dividend yield) by the end of FY2013.
PostNL has targeted a minimum €150m cash dividend (or payout ratio of 75% of underlying net cash income). According to our estimates, significant restructuring and pension expenses will decline by FY2015, allowing the company to cover the minimum dividend payments from free cash flow.
We expect increased certainty regarding the pension liability in the near term. The deficit at the end of Q1 was €244m. Among other events, legislation that should lower the pension liability is expected to be brought to parliament at year-end.
The market is concerned about the structural decline in mail volumes (7.2% fall in 2011) given that PostNL's mail division contributes 57% of group underlying operating income. PostNL hopes to offset this with a potential stamp price increase, parcel division growth, Master Plan cost savings (annual savings of €330m by 2017 compared to 2011) and potential changes to regulation.
A favourable ruling by the EU on UPS's acquisition of TNT Express would be a strong catalyst for PostNL (earliest news July 20th 2012).
Our dividend discount model (DDM) and peer comparison analysis suggest significant upside from current levels.
We rate the company as an 'outperform' with a price target of €5.50 (68% upside).
For further detail, see our research report issued this morning.