We originally wrote about PostNL (OTCPK:PNLYY) last year and watched as our investment thesis play out as expected. The company was originally priced at distressed levels since the pension obligations were growing, the mail declines were continuing at a double digit rate, and postal workers were protesting. The company's restructuring and transition to parcels had yet to drive significant growth in profitability and the TNT Express stake had yet to be monetizied. The TNT Express stake had left the income statement to look like a horrendous mess with a loss of $400 million in the first half of 2013.
PostNL was able to monetize half of the TNT Express stake to pay down debt while also improving operating performance. The share price doubled since the risk of default had been greatly reduced, however, the shares have languished since the end of 2013. Although we exited the position in mid-December due to finding other more attractive opportunities and the price achieving our target, the company continues to perform well and the shares look to be attractive.
PostNL has been able to stem the decline of mail volume with strict cost cutting discipline outside of their restructuring efforts. Increased efficiency has been found from each car unit and has benefited from a transition to the 5 day delivery model. Even with 11% declines in mail volume, the company expects to achieve 9-11% cash operating margins from mail compared to the 3.8% achieved in 2013. We still believe that the company could achieve 350-370 million euros next year, making the current price an attractive yield. The company continues to trade for ~5x trailing EBITDA, is expected to be earning a higher cash yield and still has the $460 million stake in TNT Express that it can monetize. It is likely next year that as the company improves its credit rating and builds upon the efficiency of its parcel and mail operations, the company will be trading for a much larger price than today.
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