Pullback Offers Attractive Entry Point
Attractive entry point on the back of market pullback. Although up 5% from the recent trough, TNT shares are down 9% since the beginning of May, in line with our European Logistics stock coverage universe average. We maintain our Outperform on the back of positive fundamentals and believe current share price weakness offers an attractive entry point with 24% upside potential to our price target.
Logistics disposal to serve as next likely key catalyst. Disposal of the Logistics division (ex freight forwarding) is expected before year-end at a price that at least matches book value of €1.2bn ($1.51bn) per TNT guidance. Successful disposal would (1) improve the group’s growth and returns profile and (2) trigger a sizeable share repurchase (estimated 9%-11%, dependent on takeout price).
Long-term focus on Express development. Ex Logistics, the Express division is set to play an even more pronounced role as the group’s growth driver. Besides the successful disposal of Logistics, emergence of accelerating top-line Express growth, in line with medium-term 10%-15% guidance (vs. ~10% guidance for 2006), could serve as a key fundamental catalyst in 2H:06.
Earnings ex logistics unchanged; updating ‘all-in’ estimates. Ex Logistics, we expect EPS of €1.89 ($2.38) and €2.13 ($2.68) in 2006/07 (no change) with our €35 ($42) target price implying a target P/E multiple of 13.8x (2007E) vs. current 11.1x. Due to an update of our Logistics valuation and treatment for discontinued depreciation, our ‘all-in’ estimates (inclusive of Logistics) are rising by 4% (down 4% underlying).
Risks to our bullish thesis. Key risks relate to (1) successful disposal of a large Logistics asset, (2) a major economic slowdown (to which Express would be highly geared), (3) Mail regulatory risk (4) a remaining, albeit small, gov equity stake overhang (10%) and (5) potential suitors interested in Express may choose other means of developing a greater presence in Europe.
