Initial thoughts on TNT Q1 06 results

Underlying 7% upside to our net income estimate. This morning, TNT reported Q1:06 total net income of €205mn (+6% yoy; beating our €197mn estimate by 4%) and EPS of €0.47 (+11% yoy bolstered by share repurchase). Underlying net income was approximately €220mn (+12% yoy) and beat our €205mn estimate by 7% (one-offs related to French Logistics disposal costs, extra-day count effect in Express and one-time mailings in Mail). Group revenue totalled €3.5bn (+7% yoy; 5% better than estimate) with EBIT totalling €329mn (+14% yoy; +17% yoy underlying or 12% better than estimate) implying a group EBIT margin of 10.2% (+80bp yoy) vs. estimated 9.3%. Net finance expense and tax rate exceeded estimates, accounting for the reduction of upside at EBIT of 12% to 7% at the underlying net income level. Total underlying EPS for Q1 was €0.50 or 6% better than our estimated €0.47 and 16% ahead of €0.43 a year ago – growth exceeded that of net income due to the recently concluded share repurchase programme (share count down 4% on a year ago).
Express: key driver of upside. The key earnings driver for the group was Express with 14% headline revenue growth and an 8.6% EBIT margin yielding EBIT of €124mn (+31% yoy). Half the 110bp yoy margin gain came from the extra Easter-day-count effect resulting in an underlying performance of about 8.0% (in line with our 8.0% margin target) implying €116mn underlying EBIT (3% better than our estimate). TNT noted strength from Benelux, Germany and Italy – we expect this reflects both continued strong cross-border trends (particularly on the ground where volumes expanded in double digits) as well as market share gains. The day-count benefit in Q1 is expected to be offset fully in Q2 (i.e. ~€8mn of EBIT).
Mail and Logistics also beat underlying estimates. The Mail division delivered 3% (vs. our expected 1%) revenue growth and a 21.9% EBIT margin (vs. 20.5% estimate) yielding EBIT of €222mn (+3% yoy and 10% better than expected). Underlying core volume losses of 1.5% yoy were better than our expectation of -3%. However, adjusting for one-time benefits related to healthcare and tax mailings, we estimate the underlying mail volume loss was probably slightly better than our estimate (~-2.5%) implying an underlying EBIT margin of 21.5%, still 100bp better than expectations. Additionally, €15mn of masterplan savings were realised in the quarter (150bp of margin benefit) and direct mail declined 9% due to price competition from alternative media. As for Logistics, underlying EBIT of €45mn beat our €27mn estimate implying a margin of 4.2% (vs. 2.5% estimate), apparently as a result of broad-based incremental improvement of the trading environment relative to a depressed comparison.
Confidence in existing guidance reiterated; new €75mn cost savings plan. TNT reiterated existing divisional guidance (i.e. no change) and also announced a new cost-cutting programme that should have an annualised impact of €75mn by 2008 (~5% upside to full-year 2007 net income estimate) savings coming online in 2006). This cost-cutting programme, related in part to internal reorganisation as well as reduced ‘one-time’ spending (e.g., tax investigation, insurance excess, rebranding) is expected to positively impact the non-allocated cost line item.
Our rating is Outperform. This morning’s result from TNT is solid across all divisions and supports our estimates and investment thesis. Key catalysts in the near term include: (1) progress toward the disposal of Logistics and the potential premium acquired, (2) the resultant share buy-back that we believe is likely to ensue, and (3) potential continued outperformance from the Express division (and to some extent, Mail and Logistics). TNT currently trades on 13.8x and 12.3x our 2006 and 2007 EPS estimates and our €32.50 year-end 2006 target price implies a target multiple (2007E) of 14.1x or 14.5x if we exclude the €0.80/share of contingent tax liability still included in our target (an assumption that we believe appears increasingly overly conservative). Note that our EPS estimates and therefore these multiples exclude any consideration of a Logistics proceeds buy-back, which we estimate could drive EPS upward by as much as ~8%. We rate TNT Outperform.