DPSGY - Deutsche Post: Free Cash Flow Remains Strong

2023-04-13 02:06:24 ET

Summary

• Deutsche Post saw a drop in EBIT across the DHL Express and DHL Global Forwarding, Freight segments for Q4 2022.
• However, growth on a holistic basis has continued to remain strong, and free cash flow growth has continued.
• I continue to take a bullish view of Deutsche Post.

Investment Thesis

I continue to take a bullish view on Deutsche Post based on strong free cash flow as well as a potential recovery in volume growth across the spring and summer months.

In a previous article back in December, I made the argument that I took a bullish view on Deutsche Post (DPSGY) based on strong growth in revenue and earnings, along with e-commerce growth continuing to show signs of acceleration.

While the stock is still significantly below highs seen in 2021 - the stock is up by just over 10% since my last article:

The purpose of this article is to assess whether upside for Deutsche Post can continue from here - taking Q4/FY 2022 results into consideration.

Performance

When looking at revenue and EBIT, we can see that DHL Express and DHL Global Forwarding, Freight are the two largest business segments for Deutsche Post on both of these metrics.

To put these figures into a broader context based on historical performance, the following heatmaps were generated to assess revenue fluctuations by quarter over the past two years.

DHL Express

We can see that EBIT for Q4 2022 has fallen significantly from that of Q2 2022 - and while year-on-year revenue was up slightly by 2.5%, year-on-year EBIT was down by 15.3%.

DHL Global Forwarding, Freight

For DHL Global Forwarding, Freight - EBIT is also down quite significantly over the past two quarters. While the recorded EBIT figure of €402 million is down by 0.2% year-on-year, that of revenue is down by 4.6% year-on-year.

While EBIT had been seeing overall growth across the first three quarters as compared to last year - Q4 2022 results were less encouraging - with the company citing declining volumes as a result of the macroeconomic slowdown towards the end of the year.

Moreover, while B2C volumes for Q4 2022 remained higher than that of Q4 2019 - B2B volumes were down over the same period.

B2C

B2B

In spite of the pressure on earnings in the recent quarter, EBIT for the year as a whole continued to remain strong - up by 5.7% on that of the previous year. This translated into further growth in free cash flow - with FCF excl. net M&A coming in at over €4.6 billion - exceeding guidance of €4.2 billion.

As such, the company was able to raise its dividend payment to €1.85 for FY 2022.

In this regard, while the drop in EBIT across the company's two largest segments was concerning - I take the view that Deutsche Post continues to maintain a good cash position to weather the reduction in earnings. Moreover, the past two years have shown that EBIT for DHL Express has traditionally been stronger during the spring and summer months (Q2 and Q3). Should we see EBIT growth rebound in the next two quarters, then the stock could still see further upside from here.

Risks and Looking Forward

Going forward, I take the view that investors will closely watch EBIT performance across DHL Express as well as DHL Global Forwarding, Freight to see whether earnings pick up over the next two quarters.

This will be dependent on both a recovery in volumes from that of Q4 2022, as well as mitigation of cost drivers such as fuel and foreign exchange. With that being said, higher energy prices in 2022 did not hinder growth by too great a margin for DHL Express, while EBIT of the DHL Global Forwarding, Freight segment for Q2 and Q3 2022 was up sharply on that of the same quarters for 2021.

As such, I see the main risk as being on the volume side - i.e. shipping demand volumes continue to see a decrease if recessionary conditions become particularly acute. Q2 performance will be a significant indicator as to whether this will prove to be the case.

However, the company's continued growth in free cash flow makes me optimistic that Deutsche Post can withstand potential pressure on earnings going forward.

Conclusion

To conclude, Deutsche Post has continued to see revenues and earnings rise overall in spite of downward pressure on Q4 earnings. Given the company's strong free cash flow position and potential for earnings recovery in the next two quarters, I continue to take a bullish view on Deutsche Post.

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