Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: NZ Post flounders while peers deliver results

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Selling part of Kiwibank would give firm cash to invest in its parcel business

German postal provider Deutsche Post listed on the sharemarket in 2000 and in 2002 achieved full control of international package and logistics company DHL. Photo / AP
German postal provider Deutsche Post listed on the sharemarket in 2000 and in 2002 achieved full control of international package and logistics company DHL. Photo / AP

Why does New Zealand Post continue to flounder while Deutsche Post, the German postal provider, has significantly outperformed the Frankfurt sharemarket in recent years and Royal Mail, the UK mail operator, has just had an extremely successful IPO?

A brief assessment of the three post providers shows that the two European companies have clear e-commerce driven parcel and logistics growth strategies whereas New Zealand Post has been adversely affected by the requirement to contribute substantial capital to Kiwibank, its 100 per cent owned subsidiary.

In the mid-1990s Deutsche Post made a huge investment in state-of-the art technology that enabled it to automate 90 per cent of its mail sorting and deliver 95 per cent of all domestic letters in less than 24 hours. This investment was undertaken just before the German government liberalised the country's postal services to encourage more competition.

The German postal operator then listed on the sharemarket in November 2000, following the sale of a 29 per cent stake by the Government, and in 2002 achieved full control of DHL, the San Francisco originated international package and logistics company.

Deutsche Post is now a major international logistics group incorporating DHL with 475,000 employees in 220 countries. Its goal "is to remain the postal service for Germany and to become the logistics company for the world".

Since the end of 2008 the group's sharemarket value has soared from 14.4 billion euros to 30.2 billion euros ($50.2 billion).

Royal Mail's origins date back nearly 500 years to the time of King Henry VIII.

The UK post office introduced the world's first adhesive stamp, the Penny Black, in 1840; the pillar box in 1852; telegraph services in 1870; and parcel post in 1883.

Royal Mail's core operation is the collection, sorting, transportation and delivery of parcels and letters in the United Kingdom. This service operates under a "one price goes anywhere" principle on letters and parcels within the domestic market.

It also owns GLS (General Logistics Systems) which operates a substantial parcel business in 22 European countries.

Royal Mail, like Deutsche Post, has taken advantage of the huge increase in online purchases by individuals and businesses.

According to the recent IPO prospectus; "the increase in e-commerce has driven growth in the number of parcels sent in the UK and has led to a structural shift within the UK parcel market. The group has benefited from this growth (and) forecasts that over the next three years, e-commerce will drive business to consumer (B2C) parcel volumes growth of five to six per cent per annum".

Royal Mail has a clear growth strategy for its parcel business based on a number of core elements including;

• Making a substantial investment in barcoding technology for parcels and their tracking systems.

• Expanding the automatic sorting of small parcels.

Group revenue has steadily increased over the past few years and analysts expect this trend to continue.

Royal Mail has gone from a loss-maker six years ago to adjusted net earnings of 345 million for the March 2013 year. Analysts forecast net earnings of over 500 million by 2015/16.

The group issued a prospectus in September for the sale of government shares at an indicative price range between 2.60 and 3.30 a share.

The price was set at 3.30 after the institutional offer was 20 times oversubscribed and the retail offer 7 times.

The company's 150,000 UK-based eligible employees received 100 million free shares, representing 10 per cent of the issued capital, and the government's holding has been reduced to 30 per cent.

Royal Mail's share price closed at 5.96 on Thursday giving IPO participants a capital gain of over 80 per cent and resulting in a sharemarket value of 5.9 billion.

Austrian Post, PostNL in The Netherlands, bpost in Belgium and SingPost in Singapore are also listed on stock exchanges.

Unfortunately the story in New Zealand is far less optimistic even though New Zealand Post reported net earnings, before one-off gains from the sale of assets, of $45.4 million for the June 2013 year. The problem is that the group's core postal services reported a net loss of $51.5 million for the latest twelve month period (see table).

Chairman Sir Michael Cullen and chief executive Brian Roche made the following comments in the group's annual report: "In line with global trends, the decline in letter mail volume has accelerated. The volume of mail processed fell by 7.5 per cent [compared with a 6 per cent drop in the previous year] resulting in 63 million fewer items in our network.

"The physical product carried in our network will eventually shift to being dominated by parcels and small packages. Our strategy recognises that the future of the logistics business is going to be underpinned by the physical delivery of items, rather than letters."

No one would argue against the importance of parcels but what investments has NZ Post made in this area? What has it done to capture the e-commerce trade?

For example, parcels were mentioned only thirteen times in the group's 2011 annual report whereas Kiwibank was referred to 197 times.

One of the problems with NZ Post is that Kiwibank is soaking up most of the group's surplus cash and seems to be squeezing out the traditional postal services.

Kiwibank was established as a fully owned subsidiary of NZ Post in 2002 because the start-up bank could use over 200 postal outlets to service customers.

However, start-up banks are capital hungry and NZ Post has contributed $360 million of capital to Kiwibank over the past decade, without receiving any dividends. According to NZ Post's annual report: "Changes in the Reserve Bank's regulatory requirements and general market growth means that Kiwibank will require further capital. Kiwibank can meet some of this demand itself, while New Zealand Post plans to commit $100 million over the next two years".

Meanwhile the Crown has contributed capital of only $192 million to NZ Post. Thus NZ Post has had to bridge the gap between the $192 million contributed by the Crown and the $360 million it has had to invest in Kiwibank by selling assets. This includes the sale of New Zealand Post House in Wellington and 35 per cent of Datacom in the June 2013 year. These sales realised over $200 million.

The reality is NZ Post is asset rich but cash poor because Kiwibank, the group's best performing operation, doesn't pay a dividend and will require $100 million of additional capital. As a consequence NZ Post does not appear to have invested heavily in its parcel business, which has the best long-term postal growth prospects.

Thus the company has two choices. It can either focus on Kiwibank and let its postal operations decline with more and more branch closures and staff layoffs.

The other alternative is to partially monetise its Kiwibank shareholding by selling a minority stake to the Crown, a trade buyer or through an IPO. This would give NZ Post cash to invest in its parcel business, fund its ongoing commitment to Kiwibank and pay a higher dividend to the Crown.

A partial IPO of Kiwibank makes more commercial sense than a sell-down of Genesis Energy. It would also have a greater chance of success because The Treasury, which has made a terrible mess of the Mighty River Power, Meridian Energy and Air New Zealand sell-downs, would not need to be involved.


Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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