Value Investors Club / BPOST (BPOST BB)

Description

bpost is an interesting and cheap situation where the recent past has provided it a place in the ‘pariah bin’. With new management, the reshuffling of Belgium operations and the announced acquisition of Staci, the worst seems behind. Pro-forma the acquisition of Staci I estimate bpost is trading at 3-4x FY24 ev/ebitda compared to peers trading at 10-15x. This will not be a ‘quick return’ kind of investment, but I believe that the current levels provide an attractive entry point in a company exposed to secular growth tailwinds. Just a return to ‘somewhat normal’ should be enough for attractive returns (as in, >100%). The upside from a full return to ‘normal’ is many multiples the current share price. With some patience investors should do quite well over the next years.

A complicated history

bpost is the Belgian postal operator. Originally mainly focused on mail delivery activities in Belgium, the company today is the result of a ton of (small) acquisitions. As with many postal operators in the past, the strong cash flows generated from generally monopolistic mail operations provided players with the funds to expand and diversify operations. The need for this accelerated with increasing penetration of e-mail when postal operators realized that their cash cow mail operations were about to get hit. As consequence, postal operator’s revenue streams (particularly European) today constitute of a variety of revenue sources.

bpost was not different. Up to 2017 bpost did quite a few overall relatively small acquisition which resulted in a somewhat messy revenue stream from many kind of operations. But the big pivot away from mail was in 2017 when the company acquired Radial, a large 3rd party parcel logistics provider with exposure to the US. Again, as with many legacy postal operators, bpost saw the opportunity to compensate their declining mail volumes with the strongly increasing parcel volumes as a consequence of growing e-commerce volumes.

The way legacy postal operators are handling this transition (i.e. declining mail volumes vs increasing parcel volumes) varies a lot between players. Some went about it organically, others via acquisitions; some only focused on the last mile, others on fulfilment and logistics as well; some operators integrated the network (i.c. one network for parcels and mail), others kept it separated; local vs cross-border; etc. The industry is complex and rapidly evolving. The strongly growing volumes from e-commerce as B2B activities are rapidly changing the landscape. This has been a new, very aggressive development that came on the back of rapidly deteriorating cash flows from legacy mail operations, providing many players a good amount of stress. And these legacy players involved were generally fat, lazy, slow-turning companies – a result of decades of stable and often monopolistic government-like operations.

The point I’m trying to make with the previous discussion is to establish a framework for bpost’s past and current choices (and the acquisition of Staci – more on this later). Looking back, bpost – like many players – would certainly have done things differently and more efficiently. But I believe bpost’s overall current strategy is sound. With the acquisition of Radial, bpost chose the international + 3rd party logistics and fulfillment path. A large issue that legacy players are encountering is that their parcel delivery operations are commoditizing more rapidly than previously assumed. The ‘X’-dynamic of declining mail earnings compensated by increasing earnings from growing parcel volumes is turning out to be more difficult than previously thought; parcel unit economics are deteriorating pretty quickly. In that light, I believe that the choice of focusing on 3rd party fulfilment and logistics is not a bad one.

How did bpost’s share price get to these levels

Since the acquisition and integration of Radial in 2018, bpost has been working diligently to focus its activities on parcel logistics, selling and closing smaller operations, and trying to grow its 3rd party logistics operations. This all proceeded rather well until 2020, when a string of governance-related issues at the executive and operational level hit the company hard.

It started when old CEO Jean-Paul Van Avermaet was forced to leave when it was discovered that he had been involved in some shady deals back at his old employer G4S. His successor Dirk Tirez, a long-time bpost employee, turned out to be not much better. Tirez himself (along with a few other managers) was fired after 1.5 years for (co-)participating in fraudulent practices with respect to the concession for the delivery of newspapers and magazines in Belgium. It was discovered that bpost had been operating a cartel together with publishers DPG Media and Mediahuis.

These violations relating to the newspaper and magazine distribution concession pushed the government, the Belgian Competition Authority and bpost to perform (internal) group wide reviews of other tenders and public contracts. These reviews have now mostly been concluded, leading to a one-time charge of €75m for bpost and an annual impact of €10m on ebit from the repricing of certain State Services contracts (related to traffic fines, 679 accounts and license plates contracts).

But the ‘big one’ is still pending, i.c. the impact of the review of the fraud involving the concession for delivery of newspapers and magazines. In theory, bpost could face a potential fine of more than €400m, corresponding to the anti-cartel rules and policies in Belgium which indicate a possible maximum fine of up to 10% of company revenues. Assuming 2021 revenues of €4.3bn, this would indicate max. €430m. This is however extremely unrealistic. It would be much more probable that an eventual fine would reflect either revenues of the Belgium division (which held the concessions) or even the concession itself (i.c. max 10% of the full size of the contract of €175m). But even more: bpost has so far not even booked any provision for an eventual fine as it views the risk of having a fine as ‘possible but not probable’ at this stage, based on months of reviews and discussions with all parties involved.

Besides the above, where the worst definitely seems behind for bpost, there is currently great uncertainty in the Belgian newspaper and magazine delivery market. Following the fraud that was unearthed, the government killed the old system of concessions and introduced a new one, where everyone can bid directly for volumes with the publishers and publishers are compensated (subsidized) directly by the government with respect to the cost for the delivery of newspaper and magazines. This is a complete overhaul of the old system. There’s very little visibility on the impact of this overhaul and thus a major reason for uncertainty to many.

I don’t want to go a lot into details about this change, as the impact is mainly headline news related and less so on the monetary side. In theory bpost could lose all revenues related to these operations, reflecting €125m under the old concession (at ~8% ebit margins). But while the ebit loss on the contract is not much, there’s 1000s of employees involved in the delivery operations and restructuring costs could be large. However, while we don’t know the status of this ‘reshuffle’, bpost is rather confident that a large restructuring of these operations will not be necessary. In addition, the government repeatedly indicated that it wants to avoid this, for obvious reasons (to keep in mind that the Belgian state owns 51% of bpost). We will know more by early July when the current concession system ends and it will be clear what the new dynamics will be.

Lastly, another reason for bpost’s poor share price performance has been FY23 results. bpost suffered strongly from the impact of rising inflation as (wage) inflation adjustments are regulated in Belgium; there is a fixed mechanism for this. Consequently, the impact of the strong inflationary pressures on the cost structure has been much faster and stronger than the impact on the revenue side; bpost has not been able to fully mitigate this impact on pricing. But while I don’t expect bpost to be able to recoup all on pricing, with inflation coming down strongly the next few years are set to look much better.

Why bpost is interesting today

After all the turbulence of the past few years, many (Belgian) investors threw in the towel and just took their losses. Sentiment on the name is now negative, very negative. Keep in mind that many institutional investors in Europe transitioned to ESG / ‘sustainable’ mandates over the past years. Even if they didn’t wanted, they had to wind down their bpost positions. Also, the company is of course very well known in Belgium, and every little thing tends to be highlighted in the news. This clearly did not help the share price over the past years.

But besides negative sentiment and a clear ‘wait and see’ attitude by many investors, there are other reasons why it might be a good moment to look at bpost:

The previously described chaos all relates to a relatively small part of the Belgium division. The overall Belgium division is much larger than newspaper and magazine delivery services and the beforementioned contracts. Total divisional ebitda was €195m in FY23. I estimate the total value of the concession at €10-15m ebitda. This division a.o. also holds mail (the melting ice cube, c.€930 revenue in FY23) and parcels (€500m in FY23).
The management team has been ‘refreshed’. Amongst the new names there’s CEO Chris Peeters, a smart outsider with a good track record. Both bpost and the government where so keen to attract fresh outside talent that they significant increased the max. management remuneration (Belgium has compensation ceilings at state-owned enterprises). Peeters could earn up to €1.2m p.a., of which ~50% variable with a claw-back structure.
As a consequence of the mess, bpost has been reviewed, prodded and vetted internally and externally. Never say never with this company, but we can assume all dirt has been uncovered.
FY23 has been a bad year for bpost on the back of the impact from extreme strong inflationary pressures. I would assume a return to slow growth going forward.

Lastly, and most importantly, there’s the continuous effort by the company to continue to grow its 3rd party logistics operations. Today roughly 50% of bpost’s FY23 ebitda is derived from its E-Logistics segments (E-Logistics Eurasia and E-Logistics North America), which offer 3rd party logistics and fulfilment services (mainly the Radial operations) and cross-border parcel volume handling (the E-Logistics Eurasia division). Both are very interesting and promising markets, as tailwinds from growing e-commerce volumes as well as the need for more complex parcel handling is large and secular.

To accelerate this growth, bpost recently announced the massive acquisition of Staci, a relatively high(er) quality 3rd party logistics service provider generally specialized in relatively more complex volumes. The acquisition was not cheap at an enterprise value of €1.3bn, reflecting c. 10x ev/ebitda post-IFRS 16 (roughly 12x pre-IFRS 16), but Staci generates c. 17-18% ebit margins (post-IFRS 16) - pretty good for a 3rd party logistics operator. Staci generated €771m revenues in FY23 and roughly €110m ebitda (post-IFRS 16).

With Staci the overall ebitda from logistics services should be ~60% (before synergies) and grow ~5% organically p.a. + LSD% incl. bolt-on M&A - so let’s say 5-10% p.a. trough the cycle. But more importantly, this business has large secular tailwinds and there’s good demand for these services. The business will continue to grow as the market expands and becomes more complex.

The deal should close by October and will initially be financed with available cash and some bridge financing. After closing, bpost will refinance the bridge (est. 3.5-4.0% coupon); the company does not expect new equity will be needed. Pro-forma Staci bpost’s net leverage should be ~2.9x. More details about synergies, the integration (costs), etc. will be provided at the investor day planned for Q4. After closing, bpost assumes ~2 years of integration.

Conclusion

bpost is not yet out of the woods, but we can see light at the end of the tunnel. After a few turbulent years the company seems to be ready to return to a growth path. The acquisition of Staci is a large one and integration is key, with all risks involved. But in a few years’ time bpost will have a relatively good quality asset base exposed to secular growth trends.

I won’t bother making exact estimates about what earnings growth could look like over the next few years as I don’t think it’ll add much value at these levels. I believe that just getting back to ‘somewhat normal’ will be sufficient for bpost to generate good shareholder returns. Looking at FY24e, I estimate bpost could generate >€500m ebitda. Incl. Staci, bpost is currently trading at c. 3-4x ev/ebitda on FY24e, with (lower quality) peers trading at 10-15x.

The real upside is a return to ‘normal’ and bpost’s valuation to start reflecting the 3rd party logistics operator industry. In this case, the upside to equity is many multiples.

Looking out a few years to FY27 on a FY23 base of ~€5bn revenues incl Staci and €590m ebitda (on arguably trough bpost earnings); assuming 3% topline growth p.a. and 12.5% ebitda margin (rather conservative assumptions imo) gets us €710m ebitda for FY27. A 7x multiple and 2x leverage (in line with management assumptions) results in €3.6bn equity, or 5x the current market cap. A 10x multiple gets me 8x.

Of course the above example is rather simplistic, but the point here is to show the attractive risk/reward at these levels. There are a lot of moving parts and turning sentiment is an important driver, as well as properly closing all legacy issues and integrating Staci. But again, we just have to assume that things go somewhat back to normal to already have decent returns. But what if bpost returns to growth and gets valued like a normal, growing 3rd party logistics operator?

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Closing all reviews

More clarity on impact new delivery framework (July)

Succesfully integrating Staci

Just return to growth

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			2024	2025
Price:	3.55	EPS	0	0
Shares Out. (in M):	200	P/E	0	0
Market Cap (in $M):	760	P/FCF	0	0
Net Debt (in $M):	465	EBIT	0	0
TEV (in $M):	1,125	TEV/EBIT	0	0