Deutsche Post cut to 'sell' at Goldman Sachs

Goldman Sachs has cut its rating on Deutsche Post to ‘sell’ from ‘buy’ and its target price to 18 eur from 24 eur, according to dealers, saying any delay in German mail liberalization seems unlikely, implying volume loss and margin erosion for the company.

In a note this morning, Goldman said a delay to German mail liberalization – scheduled for 2008 – now seems unlikely.

The broker said a cost-cutting program at Deutsche Post is unlikely to compensate for revenue declines. Liberalization threatens the company’s free cash flow generation and, as such, activist/private equity investors may shy away, reducing pressure for internal change, said Goldman.

Goldman has added Deutsche Post to its ‘conviction sell’ List.

Since it was upgraded to ‘buy’ on January 24, 2006, noted Goldman, the stock has declined 1.1 pct vs. a 19.1 pct increase in the FTSE World Europe.

The German coalition government has agreed to continue with plans to liberalize the market for mail weighing less than 50 grams for January 2008, assuming agreement can be reached on minimum wage legislation, noted Goldman.

It expects this to drive poor share price performance for Deutsche Post.

The broker has reduced its EBIT estimates by 9.5 pct for 2008 and 13.7 pct for 2009.

Approximately 60 pct of Deutsche Post’s postal volume is in the below-50 grams segment, noted Goldman.

In this segment, Deutsche Post has 95 pct market share and is allowed to discount to large account suppliers by up to 21 pct, with the company wanting greater latitude in the new pricing review, added the broker.

It noted that in the UK, four years after liberalization the Royal Mail has 70 pct market share and has lost 20 pct of business collections, noted Goldman.

Deutsche Post shares closed at 21.48 eur yesterday.