TNT’s Q4 results are less impressive than they seem at first sight

The headline figures contained in TNT’s fourth-quarter (Q4) results weren’t too bad, but an analysis of its full-year financials suggests reasons why they might generate concern at US-based FedEx, whose offer to acquire the Dutch courier is expected to close in the first half of this year.

TNT announced that Q4 revenue rose 4.1% to €1.8bn against Q4 14, a growth rate that nicely outperformed European inflation. Meanwhile, it returned to the black at operating level, having recorded an operating income of €57m for the quarter, compared to an operating loss of €53m in the same period the year before.

Most of the gains came from the company’s European unit, which generates about 40% of annual group revenue, and which saw adjusted operating income margin (AOIM) rise to 6.6% in Q415 from 3% in Q414.

However, quarterly trends by their very nature tell only part of a corporate story and this may be truer of TNT’s fourth quarter than in many other cases.

What really needs to be taken into account is its cash balances and some other key variables that allow us to assess how the business is faring – and, more importantly, how much work FedEx will have to do once TNT is consolidated onto its balance sheet.

The first warning sign is a net cash position that dropped to €231m from €449m one year earlier due to falling operating cash flows.

Furthermore, investors should not perceive a positive quarterly update in Europe as a dramatic shift in trends, given that the company’s full-year AOIM fell by 0.7 percentage points to 3.6%.

In addition, TNT’s second-largest revenue contributor – the ‘domestics’ unit – recorded an uninspiring 1.3% revenue growth year-on-year, and its AOIM fell from 2.6% in 2014 to 0.9% last year.

In all this, TNT’s working capital management seems to have become less effective and operating cash flow before interest and taxes plunged 55% to €109m in 2015 from €246m in the prior year. Further down the cash flow statements, annual capital expenditure (capex) on intangible assets rose from €43m to €64m, while capex on property, plant and equipment rose from €147m in 2014 to €245m in 2015, which had a commensurately detrimental effect on free cash flow, of course.

From that perspective, FedEx – whose equity valuation has plunged 25% in the twelve months – has a lot of work to do to justify the hefty price it paid to secure a deal that, with hindsight, will have some questioning its necessity.

Source: Transport Intelligence, 19th February 2016
Author: Alessandro Pasetti