Bpost: No Negative Surprises, No Clarity On The Dividend

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About: bpost SA/NV (BPOSF), BPOSY, Includes: AED, AEG, BUD, CCRGF, ING, KNYJF, KNYJY, MBNKF, ONXXF, ONXYY, PPRUF, PPRUY, SIEGY, SMAWF, TKAMY, TYEKF, ZRDZF
by: SA Focus On Europe
Summary

After an exceptionally bad 2018, Bpost's performance seems to have stabilized.

The EBITDA increased slightly, the EBIT decreased due to higher depreciation charges.

The dividend will certainly (have to) be cut, but Bpost hasn't given any guidance yet.

Introduction

Postal services are still encountering severe pressure in Europe as the regular mail volumes continue to decrease. The only possibility to remain 'in business' is to focus on e-commerce solutions and parcel logistics. Virtually every postal company in Europe is making this transition now and some are doing it better/faster than others. Bpost (OTC:BPOSF) (OTCPK:BPOSY) is slowly making the switch and after an annus horribilis in 2018, most of the bad news appears to be absorbed by the market.

Did you miss last week's edition of Focus on Europe wherein we discussed how Intu Properties (OTCPK:CCRGF), a UK REIT, could repair its balance sheet? You can re-read it here.

Bpost: The Q1 performance wasn't too bad at all

It looks like Bpost (BPOST, Euronext Brussels) has quit its hobby of providing negative surprises, and all of the recent bad news seems to be incorporated in the share price now. And that includes a 25% EBIT decrease to 300M EUR and the very likely (almost unavoidable) dividend cut.

Source: Yahoo Finance

The Q1 results

So let's check out the financial results generated by Bpost in the first quarter of the year (which usually is one of the stronger quarters).

Bpost reported a total revenue of almost 907M EUR in the first quarter of the year, a 1% decrease compared to Q1 2019. As expected, the EBIT was substantially lower than the same quarter last year, as it fell by 16M EUR to 90.4M EUR. However, this was entirely caused by higher depreciation charges, and Bpost's EBITDA actually INCREASED from 143.2M EUR to 151.1M EUR and that's a small positive takeaway (after all, depreciation charges are non-cash charges, and at an annualized rate of 242M EUR, and that's approximately 50% higher than the expected 150M EUR in capital expenditures. (Reading between the lines, this very likely means this year's free cash flow result will be substantially higher than the reported net income due to the big difference between depreciation charges and sustaining capital expenditures).

Source: financial results

The net profit in the first quarter was approximately 50.2M EUR or 25 cents per share. This was mainly due to an above-average tax rate of almost 40%. Considering the Belgian corporate tax rate decreased to 29.58%, I would expect the normalized full-year tax rate to be around 30% so the next few quarters should have a more favorable tax treatment.

Source: quarterly results

Moving over to the cash flow statements, we already immediately notice the discrepancy between the depreciation charges and the capital expenditures (the difference is very wide in Q1 and will narrow down from Q2 on). The reported operating cash flow before changes in the working capital position was 131.7M EUR, but this takes a tax payment of just 16.7M EUR into consideration instead of the 31.3M EUR that was due over the Q1 results. So on an adjusted basis, the operating cash flow was roughly 117M EUR. The capex? Glad you asked. Just 16M EUR (due to seasonality. The capex will be much higher in the next few quarters) resulting in a nice positive free cash flow of around 100M EUR.

Last year, approximately 27% of the full-year EBIT was generated in the first quarter. If I would apply the same ratio on this year's first quarter results, the full-year EBIT would come in at around 335M EUR, so there does appear to be some margin of safety compared to the 300M EUR EBIT target.

The dividend remains uncertain

Unfortunately, Bpost hasn't provided a more definitive dividend guidance yet. Perhaps that's the smartest move as the postal services company has learned the hard way that missing expectations could have severe negative consequences.

Source: company presentation

Bpost is still guiding for a dividend payout ratio of 'at least 85% of the Belgian GAAP net income'. In the first quarter of the year, this Belgian GAAP net result came in at 60.1M EUR, or 30 cents per share so that's a good start of the year. In a previous article on Bpost, I mentioned I was expecting a full-year dividend of approximately 88 cents, and I think that still is a realistic assumption.

Keep in mind Bpost's free cash flow result will very likely exceed its net income and Belgian GAAP based net income so the coverage ratio of the dividend based on the free cash flow result should be higher than the payout ratio based on the net income.

Snippets from the AGM and recent press articles

A reader of European Small-Cap Ideas forwarded an article on Bpost that was published in Belgium's Financial newspaper. I have taken the liberty to take some quotes from that article and used Google Translate. There are some remarkable 'confessions' about the Radial acquisition and I just hope Bpost has learned its lesson.

'There were more angry customers than we though, who subsequently cancelled their contracts with Radial in 2018'

'the revenue at Radial will continue to decrease this year'

'We attracted new clients, and these contracts will start later'

'Radial will contribute 100M EUR to our EBITDA from 2022'

So it sounds like Bpost's management team is still cautiously optimistic about its attempts to improve the performance at Radial. I hope the guidance for a 100M EUR EBITDA contribution from 2022 on will prove to be correct as that would be a substantial improvement compared to the negative impact of 8M EUR on this year's Q1 EBIT (compared to the same quarter last year):

Source: company presentation

Conclusion

I'm staying put. All the bad news seems to be out in the open now, and I don't think there's anyone left who expects Bpost to keep its dividend unchanged at 1.31 EUR per share. I mentioned a dividend of 0.88 EUR per share in the previous update, and I think this is a realistic target while Bpost continues to turn the Radial ship around.

This will be the final update on Bpost in the foreseeable future as there (hopefully) shouldn't be any additional (positive nor negative) surprises.

Other news from Europe

The earnings season is in full swing, but that's obviously not what this section is about, as 'special situations' are more interesting than just rechewing financial results.

But there are a few exceptions. First of all, AB InBev (BUD) reported a very acceptable set of financial results with organic growth and increased margins. Its shareholders seem to have accepted the dividend cut (which will save BUD billions of dollars per year in outgoing cash flow, cash that could now be used for debt reduction), and it looks like the 'core markets' in the USA and Brazil are gaining momentum. But unfortunately the markets in Europe were a bit shaky that day, and InBev's share price lost a few percent. Inbev is also moving forward with the IPO of its Asian business on the Hong Kong Stock Exchange.

There was more earnings news from Belgium that deserves to be highlighted. Last summer, diaper company Ontex (OTC:ONXXF) (OTC:ONXYY) received a buyout offer from a private equity group. After rejecting the first offer, the private equity group returned with an all-cash bid of 27.50 EUR per share. Was it misplaced hubris? Was it a complete lack of objectivity? We will never know, but Ontex's board of directors didn't even put the proposal in front of the shareholders and rejected it outright as 'it undervalued the company and carried significant risks'. For some reason, most companies always seem to think a buyout offer undervalues the company, and that they are better off on a standalone basis.

Fast forward to Ontex's Q1 results, just 8 months after rejecting the offer, and its share price totally collapsed on the back of very weak results. And just 8 months after rejecting PAI Partners' buyout offer, Ontex is trading at its lowest level ever.

In a previous edition of Focus on Europe the risks of purchasing preferred securities above par when those securities are 'callable'. After seeing how ING Group (ING) 'called' preferred securities at their par value, Aegon (AEG) did the very same thing with its 6.5% preferred securities (AED). And just like in the ING situation, those preferred shares from Aegon were trading at $26/share, 4% higher than their par value of $25/share until Aegon decided to call these preferred shares.

Once again, that's pure destruction of capital, and investors should fully understand that even if a preferred security could be 'perpetual', the issuer usually has the right to 'call' these securities at a fixed price after a certain date Caveat emptor!

Kering (OTCPK:PPRUF) (OTCPK:PPRUY) has agreed to make a 1.25B EUR payment to the relevant Italian tax authorities to settle a dispute on its Gucci brand. The Italian tax man accused Gucci of avoiding taxes on in excess of 1B EUR in revenue between 2011 and 2017 by using a Swiss holding company where the taxes were paid rather than in Italy. Considering Gucci had a 'permanent establishment' in Italy during the same period, Italy claimed the taxes were due in Italy and not in Switzerland. By making a 1.25B EUR payment, Kering is now making the issue go away.

One of the companies' most favorite way to (try to) create shareholder value is by creating SpinCo's arguing some of its divisions aren't properly valued by the market. Sometimes 1+1 indeed equals three, and both ThyssenKrupp (OTCPK:TYEKF) (OTCPK:TKAMY) and Siemens (OTCPK:SIEGY) (OTCPK:SMAWF) are in advanced planning stages to obtain a separate listing for some of their respective business components.

ThyssenKrupp had to ditch its merger plans with Tata Steel as the European Commission didn't want to greenlight the strategic deal and the German company now plans to list its elevator business as a separate entity. Perhaps a good move as (pure elevator) competitor Zardoya Otis (OTC:ZRDZF) is trading at in excess of 14 times its EBITDA. In Finland, Kone (OTCPK:KNYJF) (OTCPK:KNYJY) is also trading closer to an EBITDA multiple of 15 so there's no reason why ThyssenKrupp's elevator business shouldn't be trading at the same multiples.

Elsewhere in Germany, Siemens wants to keep its shareholders happy by deploying the same approach. The German conglomerate is planning to list its gas and power unit as a separate entity sometime in 2020. As this division has been struggling lately, it looks like Siemens wants to remove this underperforming division from the forefront. And perhaps a new and dedicated management team could improve the returns and financial results…

The Metro Bank (OTCPK:MBNKF) saga continues. After hinting at a capital raise earlier this month, Metro Bank's shares have lost approximately 40% of their value, making a successful capital raise an even tougher thing to accomplish. On top of that, Shareholder Advisory Group ISS has recommended Metro Bank shareholders to vote against the re-election of four directors and to vote against the remuneration report.

As of the end of Q1, Metro Bank's CET1 ratio still comfortably met the minimum requirement, but the excess capital position has shrunk to just around 150M GBP based on the minimum capital ratios. If the bank wants to continue to pursue its aggressive growth, it will need to raise more money but even a 2:1 rights issue (2 rights allowing shareholders to purchase one new share) priced at 425 pence (a 20% discount) would raise just over 200M GBP…

Source: shorttracker.co.uk

The market is now speculating against Metro Bank and the short ratio has increased to 12%. In an ideal scenario, Metro Bank could keep the rights issue limited while attracting a strategic partner that's willing to invest in the bank at a premium to the current share price. After all, Metro Bank's share price was trading almost 500% higher less than a year ago.

The bank now needs to restore its credibility with all of its stakeholders (clients, regulators, and shareholders) and the four-digit share prices could be out of reach for a while. Priority numero uno should now be to repair the balance sheet and restore confidence.

The best thing shareholders could hope for is a short squeeze as the disclosed short positions in Metro Bank have reached an all-time high of almost 12%.

Disclosure: I am/we are long BPOSF, MBNKF, CCRGF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.