Fitch Affirms Deutsche Post at 'BBB+'; Outlook Stable
The affirmation reflects DP's balanced business profile, internet-driven volume growth in its parcels business, continued secular growth and margin improvement at Express, fairly stable credit metrics for the rating and adequate financial flexibility. This is offset by ongoing structural and margin pressures on traditional mail volumes, an uncertain economic outlook and volatility at Global Forwarding, Freight (GFF) and Supply Chain.
KEY RATING DRIVERS
Balanced Risk Profile
DP's ratings reflect a balanced business risk profile, supported by stable contribution from core mail products despite structural volume declines, a strong position in global time-definite express services (DHL) and growth in internet-led domestic parcel volumes. This is offset by the more cyclical and competitive nature of GFF and Supply Chain operations as well any restructuring related delays. DP remains one of the largest logistics services businesses in the world through Express, GFF and Supply Chain businesses.
Parcels Offset Declining Mail
Traditional mail volumes and revenues at the mail division (PeP) are declining due to higher email usage. The decline is offset by a rising contribution from domestic parcels, albeit with lower profit margins. E-commerce volume growth in Germany was 9% for 2Q16 YTD, driven by parcel growth due to the growth in online shopping. PeP has been expanding its footprint for its parcel business in Europe and other, selected non-European countries by taking over legacy DHL assets in neighbouring countries as well as Greenfield entries into new markets.
Express Growth Remains Strong
DP's Express division continues to benefit from the growth trend in global B2B business. Compound annual growth of Time-Definite-International (TDI) volumes over the past five years was 8.5%. Combined with DP's extensive global network and further investments in improving its capabilities, this has led to steady improvement in margins. Fitch expects Express to be the key growth driver for the company for the next few years. TDI volumes in 2Q16 increased 8.2% and the EBIT margin increased to a record 11.9%.
GFF Recovery on Track
GFF division is the most cyclical of DP's businesses with a direct correlation to global trade volumes. Overcapacity issues in air freight as well as ocean freight markets are keeping freight rates low. Legacy issues at DP's GFF division have meant that GFF is less profitable than its global peers. After scrapping a bespoke renewal of its IT and related business processes last year, GFF has recovered profitability well in 2016 YTD and is also improving gross profit conversion to EBIT through focus on profitable volumes.
Supply Chain Restructuring
DP's Supply Chain business remains a steady growth business with about EUR1bn of new order intake per year, with volumes underpinned by a broad range of contracts with major industrial, retail and government clients. However, margins remain low, which DP is aiming to improve through restructuring of underperforming businesses and operational standardisation. A change in revenue recognition for the contract with the National Health Service in the UK will reduce revenues in FY16. However, this is not likely to affect cash flows from the division.
Stabilising Financial Profile
Fitch expects DP's financial profile to be broadly stable in 2016, reflecting expected margin improvement and a limited impact from the EUR1bn share buyback and EUR1.25bn bond issuance for pension funding. Fitch forecasts free cash flow (FCF) to be moderately negative after assumed average capex of EUR2.3bn per year until 2017 and about 50% dividend pay-out. Fitch estimates FFO (funds from operations) lease adjusted net leverage for 2016 to be about 3.3x, higher than 3.0x at end-2015. We expect fixed charge coverage, including non-cancellable operating leases averaging EUR2.1bn per year, to stay close to 2.5x for 2016.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for DP include:
- Continued decline in mail volumes partially offset by growth at the parcels business
- Gradually improving profitability driven by growth in the Express division
- Liquidity to remain adequate due to an undrawn EUR2bn facility, moderately negative FCF and limited debt repayments
- Dividend payments in line with the company's policy of 40%-60% payout ratio
- Blended operating lease adjustment multiple of 5.5x, reflecting the large proportion of payments relating to office, IT, vehicles and building leases co-terminating with contracts that a not capitalised and aircraft, buildings and machinery that are capitalised with 8x multiple.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO lease adjusted net leverage below 2.5x and FFO fixed charge coverage above 3.5x on a sustained basis; an improving macro-economic outlook supporting performances of DHL's divisions; and continued increase in cash flow contribution from the domestic parcel business to compensate declining traditional mail profits supporting free cash flow generation.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO lease adjusted net leverage above 3.5x on a sustained basis and further weakening of FFO fixed charges coverage; significant deterioration in business fundamentals due to a protracted economic downturn or structural changes leading to significant volume; and margins reduction in the DHL divisions and consistently negative free cash flows.
LIQUIDITY
DP's liquidity was adequate at the end of June 2016 through a combination of strong cash balance and undrawn credit facility. On balance sheet cash at the end of June 2016 was EUR2,072 (of which around EUR1bn was restricted, including cash in transit and cash at decentralised subsidiaries) down from EUR2,526m (excluding restricted cash) at the end of 2015. Deutsche Post has a committed undrawn EUR2bn credit facility maturing in 2020. Under Fitch's rating case forecast, Deutsche Post is expected to be moderately FCF negative in 2016.
Комментарии