Posten-JPM research

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  • January 2000London

    J.P. Morgan Securities Ltd.Nick Ward (44-20) 7325 1500 ward_nick@jpmorgan.comTorbjrn Andreassen (44-20) 7325 4898 andreassen_torbjorn@jpmorgan.com

    This document is provided solely for the use of the Ministry of Industry, Employment and Communications (the Ministry) and Posten AB(Posten), and may not be reproduced or redistributed without the approval of J.P. Morgans compliance department other than (i) togovernmental departments or agencies with whom the Ministry customarily liaises in the course of its responsibilities for Posten; and (ii) toPosten itself, including subsidiaries and affiliated companies or organisations. In particular, neither this document nor any copy hereof maybe (i) taken or transmitted into the United States or redistributed in the United states or to any U.S. person; or (ii) distributed orcommunicated to the press or any wire service for transmission.

    Valuation Report

    Posten ABProductivity Has Been Delivered but the Cheque isStill in the Mail

    We estimate the equity value of Posten AB, excluding Postgirot, to be in the order of Skr15.2 billion (firm value Skr 16.7 billion).

    Posten is, together with Deutsche Post, the European postal operator that has improvedefficiency the most over the last five years, and Posten is today second only to TPG interms of productivity among the European postal operators.

    However, profitability is lagging. The combination of a liberalised market, universalservice obligation and a high operating leverage represents a formidable challenge forPostens management. Further restructuring is necessary in order to improve profitabilityand capture the full value potential.

    The bulk of Postens revenues, profit and value are dervived from the letter relatedoperations Brev, Frsljning and Utrikes that offer modest growth prospects in theircurrent form.

    We believe that Posten must take the lead and assume the associated risks and capitalexpenditure requirements required to develop the new information processingapplications that over time will become an important part of a postal operator.

    In order to develop a detailed understanding of the key value drivers in Postens businessportfolio, we recommend the use of economic value added (EVA) analysis. It mayalso be appropriate to consider the value impact of the strategic review recentlycompleted by Postens management.

    European Equity Research:

    Nick WardVice President(44-20) 7325 1500

    European Advisory:

    Torbjrn AndreassenAssociate(44-20) 7325 4898

  • J.P. Morgan Securities Ltd.Nick Ward (44-20) 7325 1500 ward_nick@jpmorgan.comTorbjrn Andreassen (44-20) 7325 4898 andreassen_torbjorn@jpmorgan.com 2

    TABLE OF CONTENTS

    Introduction ......................................................................................................................... 3Investment Thesis ................................................................................................................ 4

    Positives........................................................................................................................... 4Risks................................................................................................................................ 5

    Overview of the Swedish Postal market ................................................................................ 6Overview of Posten .............................................................................................................. 8Postens Relative Operating Performance ........................................................................... 10Valuation ........................................................................................................................... 13

    Valuation Methodology.................................................................................................. 13Valuation Issues ............................................................................................................. 13Valuation Summary........................................................................................................ 14Divisional Valuation: Posten Brev .................................................................................. 15Divisional Valuation: Posten Utrikes .............................................................................. 18Divisional Valuation: Posten Frsljning ........................................................................ 21Divisional Valuation: Posten Logistik............................................................................. 25Divisional Valuation: PostNet......................................................................................... 28Divisional Valuation: Postfastigheter .............................................................................. 29Divisional Valuation: Overhead and Headquarter............................................................ 30

    Trends in European Postal Services .................................................................................... 31Appendix ........................................................................................................................... 33

    Divisional Weighted Average Cost of Capital Calculation............................................... 33Divisional Discounted Cash Flow Analysis..................................................................... 34Regression Analysis for PostNet ..................................................................................... 36Trading Multiples........................................................................................................... 37Logistics and Express Transaction Multiples................................................................... 39

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    Posten ABJanuary 2000London

    INTRODUCTION

    This report sets out J.P. Morgans preliminary views on the intrinsic value of Posten AB,excluding Postgirot.

    For our analysis, we have relied on the following information sources:

    publicly available information, including annual reports;

    divisional forecasts outlining revenue and operating performance until 2002, as suppliedby Postens management; and

    interviews with the managers of the principal business areas.

    This report was prepared at the same time as Postens senior management team conducted acomprehensive strategic review of Postens business. In this context, we want to note that thereport does not consider the value impact of any initiatives that may be implemented as aresult of the strategic review. In addition, the report contains only a brief appraisal ofPostens investment thesis (positives/risks) since we felt that it was not meaningful to dodetailed work in this area at a time when Postens strategy was subject to an internal review.

  • J.P. Morgan Securities Ltd.Nick Ward (44-20) 7325 1500 ward_nick@jpmorgan.comTorbjrn Andreassen (44-20) 7325 4898 andreassen_torbjorn@jpmorgan.com 4

    INVESTMENT THESIS

    Positives

    High level of efficiency and productivityPosten is second only to TPG of the Netherlands in terms of productivity among the Europeanpostal operators. If it is able to maintain/improve its efficiency, it should stand to benefitfrom the European postal deregulation scheduled to begin in 2003.

    High-end growth and financialsPosten operates a mature cash flow generating mail business and a fast-growing express andlogistics business. As a result, Posten offers its owner an opportunity to participate and beexposed to a fast growing sector while still having the security and assurance that stable cashflows give.

    Well positioned for e-commerce driven growthPostens dominant position in Sweden and its nationwide network will make it a winner inSweden from the current trend toward business-to-residential sales over the Internet, as itsoperation and network is geared toward the key home delivery market.

    Integrated operating modelPosten has assembled a combination of growth and mature cash flow business units which,we believe, will offer its customers an increasingly integrated product line and cater to alltheir supply chain and transportation needs. Posten Brev gives access to residentialconsumers. Posten Logistik positions the company towards the larger, more cyclical, but notas fast growing business-to-business parcel business. Postens move into third-party logisticswill provide it with an asset-light, high-return on capital business which has the potential togrow rapidly over the next few years.

    Expansion into the Baltic rimPostens build up of a network in the Baltic rim gives it a first mover advantage in a marketwith a combined population in excess of one hundred million people. We believe thisinvestment will pay off in the long term, although margins are currently depressed due to highnetwork expansion costs. Furthermore, we believe this investment will make Posten anattractive partner for many of the large international express delivery companies.

  • 5

    Posten ABJanuary 2000London

    Risks

    Volume growthIn predominantly fixed cost based operations, volume growth is key to profitability as highercapacity utilization translates into lower unit costs. Posten is today one of the very fewEuropean postal operators to experience an overall decline in mail volumes. If, as Postenexpects, this trend continues the only way for Posten to maintain its current profit levels willbe through continued aggressive cost cutting.

    Substitution out of traditional mailElectronic mail and Internet based information processing services are real risks for postaloperators, as on-line transmission should eventually capture an important piece of the existingbusiness. Sweden already has one of the highest Internet penetrations in the worl