The number of Britons ordering goods over the internet via mobile devices jumped by 181% in the first quarter of this year. This surge is largely due to the popularity of smartphones and tablets. Indeed, mobile is now the fastest-growing segment of online retail, which itself grew by 29% in the quarter, and now accounts for almost 10% of all UK shopping transactions.
One way to cash in on this is through German logistics group Deutsche Post, which owns DHL (63% of profits). In line with rivals such as Fedex and UPS, DHL recently pushed through an across-the-board price rise of 5% to 6% to offset fuel costs. Encouragingly, the division’s chief financial officer believes this hike “will stick” due to robust demand.
Geographically DHL operates across the world, but is heavily weighted towards emerging markets. That puts it in pole position to profit from the shift towards urbanisation in countries such as China. Indeed, growth rates within the package-delivery industry typically grew 1.5 to two times more quickly than global GDP. So assuming output expands by about 4%, then DHL should see revenues leap by at least 6% to 8% in 2011.
What’s more, with a fair slug of this falling to the bottom line, operating profits (EBITA – earnings before interest, tax and amortisation) should grow by about 13.5% to €1.65bn this year. That should continue through to 2015.
Deutsche Post (DAX: DPW), rated a BUY by Nomura
Elsewhere, Deutsche Post’s German mail unit is being hit by competition after the €6bn domestic market was deregulated in 2008. But this business should be viewed as a cash cow. It delivers 65 million letters every working day, enjoys an 86% share of the market, and, with some belt-tightening, should be able to churn out annual profits of around €1.0bn over the medium term.
These cash flows can either be reinvested in DHL, or used to lift the tasty 4.8% dividend yield. Chief executive Frank Appel is “optimistic” about prospects,and expects 2011 EBITA (after central overheads) to come in at €2.2bn-€2.4bn. I would value the whole group on a sum-of-the-parts basis, using EBITA multiples of eight and 12 respectively for the mail and logistics operations. After allowing for the central costs, net cash of €1.3bn and a €4.6bn pension deficit, that gives an intrinsic worth of €17.50 a share.
What are the risks? The long term cannibalisation of printed letters by emails is something to watch, and any double-dip would hit volumes at DHL’s more discretionary services. Even so, rival UPS was recently bullish on its performance. So given its scale and brand strength, Deutsche Post is an attractive play on e-tailing. Nomura has a target of €18; first quarter numbers are out on 10 May.
Recommendation: BUY at €13.20