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“Most human beings have an almost infinite capacity for taking things for granted,” wrote Aldous Huxley in Brave New World.
Fortune favours the bold. The chief executive officer of Deutsche Post DHL, Frank Appel, must know that.
Mr Appel has done a great job since he took the helm of the German mail and logistics behemoth in February 2008, but he could do more now to show the transport and logistics industry how the market leader does business.
As it pursues growth, DP DHL is eager to become “the logistics company of the world”. In its current form, however, higher operating profitability – a key gauge of performance – will be difficult to achieve. Certain assets, such as its Supply Chain and Global Forwarding divisions, are a drag on the group’s margins.
DP DHL believes its core strength hinges on size. Its shareholders have enjoyed plenty of upside since the credit crunch, but their shares are now stuck at around €25 – where they have traded for more than a year. With a yield above 3%, DP DHL stock looks a lot like an overpriced bond.
Is Mr Appel up for it?
A soft break-up of the group would help the company release value for shareholders at a critical economic juncture.
Results released today have emphasised that DP DHL has problems in two parts of its business: supply chain and global forwarding – particularly in air freight.
The group’s capex is under control, although the company has burned more cash in the third quarter and in the first nine months of 2014 than in 2013. The business’s underlying profitability is holding up relatively well, with revenue and net profit up 2% and 8%, respectively, for the first nine months of 2014. Net debt rose quite significantly to €2.6bn from €1.5bn at the end of 2013.
From January to June, Deutsche Post DHL increased revenue only slightly as “business continued to suffer from substantial currency effects,” the company said earlier this year. Currency and macroeconomic headwinds: this pattern is likely to last for some time.
The four units
DP DHL is split into four operating divisions. Each is under the control of its own divisional headquarters.
The Global Forwarding unit turns over €15bn, with operating profit (Ebit) of about half a billion euros, for an implied operating margin of 3.2%. The Supply Chain division’s operating profitability is 20 basis points lower, on revenue of €14.2bn. These two units dilute the group’s overall profitability and the relative valuation of DP DHL shares on the market.
The Express unit has revenue of €12.7bn and Ebit of €1.1bn, which makes it the most profitable division, with an Ebit margin of 8.9%. Similarly, the Mail business has an Ebit margin of 8.5%, but is bigger, with revenue of €14.4bn.
Financial engineering is not necessarily the answer, yet the value of “express” and “mail” could be better preserved if the two divisions were spun off.
Synergies may be lost, but Express, in particular, could command a forward EV/Ebitda multiple north of 9x, for an implied premium of at least 20% to DP DHL’s relative valuation. Express boasts higher growth prospects, higher profitability and strong market positioning.
The allure is obvious. It doesn’t make much sense for these two divisions to be part of a company whose stock trades at a low 0.5x EV/revenue and at less than 7x adjusted cash flow, on a forward basis.
Size is not the answer in this environment, but Mr Appel must know that, too.
(Revenue and Ebit figures as at the end of 2013)