Hello and welcome to Inderes TV. Today I'm in the studio with analyst Arttu Heikura and we are going to talk about Posti, that was listed on Nasdaq Helsinki last October. Hi Arttu.

Hi, Pia.

So let's start with what does Posti do and how many revenue streams does it have? Okay, there are three main revenue streams. The first is the traditional postal services, so I mean letter mail distribution. The highest in terms of revenue is the e-commerce and delivery services segment. So that is basically a package delivery business. And the third one is fulfillment and logistics. That's a tough word.

Yeah, logistics services. That business consists of kind of outsourcing services for companies to outsource their entire logistics. Entire logistics. Yeah, I mean. Entirely, yeah, all of their logistics needs. Yeah,

Sorry,

yeah, yeah.

yeah. Uh but actually the business is maybe more international than you would suspect. Mm-hmm. Could you explain a little what the international business is?

Okay. So, well, um the postal services are all in Finland, uh so they are not international. Then the e-commerce and delivery business operates in Finland and in Baltic countries, but the Baltic countries is rather small. from this entire business. And then the fulfillment and logistics services, they operate in Finland and in Sweden. And Sweden is marketable, but Finland is the stronger, highest revenue stream for the FLS business. And um That is Sweden, Baltic and Finland.

Okay. Well, if you look at paper mail, mainly letters,

Mm

I mean, -hmm. the the delivery volumes have declined and will continue to decline going forward. Where will Posti's growth come from going into the future?

Yeah. So that decline of mail letters comes from digitalization. So people are more and more communicating through digital channels. And in future the revenue growth comes from outside of the postal services. So in the FLS and e-commerce and delivery businesses which are kind of growing. Pretty much they are components that grow higher than GDP, but there are also some components that go in line with GDP development. But all in all, there are megatrends that favor Posti. The strongest one, in my opinion, is the online transition, the retail business is, the online share of retail business is growing. And in the e-business, I mean fulfillment and logistics, there is this outsourcing that is kind of growing its penetration, so I mean retail companies and also industrial companies are kind of outsourcing their logistics to third-party businesses, Mm-hmm. uh I mean like Posti. to gain more, I mean the logistics can be quite capital intensive, so with that you can kind of keep your business model asset-light and focus on the main business areas or your core business and with that you can kind of The cash flow you get you can invest then in your own capabilities and not in the logistics system, so those are the main drivers. In the postal services Posti is also kind of trying to get some of the digitalization trend, so Posti has this digital post. Digital post, I mean it's OmaPosti, that could be one channel to kind of distribute those digital letters in the future. Right now there is in Finland this kind of transition going on in the public sector that's all I mean not all but the majority of public sector mail letters are going to the digital mode and with that in the future these digital letters can also be distributed through Posti's OmaPosti channel, so that is one factor that could kind of compensate the traditional mail letter decline.

Then if you look at Q1, how would you summarize the quarter and also of course there was the M&A, they acquired Kivra.

So Q1 was, against our estimates, somewhat poor. the mail letter decline was kind of high, but overall Posti succeeded in kind of compensating the decline in revenue with higher ticket items, I mean higher prices, and also through cutting fixed costs. So overall the postal business profit was even higher than we anticipated. But the main issues during the first quarter were in the other businesses. So we expected them to improve their profits, but their direction was Was, you know, the other direction, I mean, EBIT decreased in both businesses. In e-commerce and delivery business, it was due to, due to, I mean, there are. three types of packages. There are B2B packages, there are B2C packages and inside the B2C packages there are also C2C, I mean customer-to-customer packages. These C2C packages are growing quite nicely. But the main issues come from the B2B packages, they are decreasing due to the poor economic cycle and these B2B packages are kind of high-ticket items and also, I mean, quite good scalable business, so when the revenue comes down in the B2B packages it also impacts the whole segment's profitability and even though the C2C packages were able to grow, that is not that scalable at the moment so the growth from the C2C packages wasn't enough to compensate for the decrease in the B2B packages. And in the FLS business the utilization rate was pretty low due to, I mean, poor market environment and also Posti's one key customer decided to insource its logistics and it kind of temporarily pushed down the utilization rate and with that the EBIT performance wasn't like we estimated. So that's the overall picture from

Mm

the Q1. And when it comes to the M&A, Posti acquired this Kivra, which is This, what I explained earlier, it is this digital post business. It is one of Posti's competitors. I mean, there are kind of two private companies and one public company. And with that acquisition, there is only one public and one private company left. I have to highlight that this Kivra is very, very low. It is such a small player. But with that Posti kind of gained new customers and also kind of wiped the private competitor out of the market. So I mean it seems that this is a good investment given that I don't think that the overall investment is That remarkable.

Yeah.

Absolute heroes.

Yeah, Yeah. and as it leaves Posti as the only public company doing this, I suppose, it is positive. So Posti has a very high dividend yield of around ten percent. To what extent is that dependent on the liquidation of the around one hundred million euro real estate portfolio? And once that is done, can Posti still maintain this

Mm-hmm. dividend yield level? Yeah. The liquidation of the real estate portfolio, its impact on the dividend is rather high. I mean with the one hundred million portfolio and with its liquidation, if I remember correctly, it's about half of the entire dividend through these three to four years. So that is a major driver behind the overall dividend. in coming years. But it also requires that Posti is able to keep its EBIT on these levels or even improve it.

Hmm.

So if Posti's profit decreases dramatically, I don't think that this ten percent dividend yield is at that point realistic. So it depends on the liquidation and also on the profit development. And if we think about like going past, if we think about dividend yield after 2030, after the whole real estate portfolio is liquidated, then this kind of payout ratio is Well, I see that this kind of payout ratio is not sustainable with the current profitability level. So if the company is thinking about a payout ratio of 100%. After 2030 they have to improve their profitability even more than we are anticipating. So the next three to four years, I mean good dividend yield, but after that it is much dependent on the profitability development.

Yeah, yeah, makes sense. And then finally, what's the valuation like and what is our recommendation?

Well, that valuation is, I mean, from the multiples perspective Posti is priced, in our opinion, rather neutrally. The absolute multiples are not kind of high in absolute terms, but we see that as a new player. And overall we see that the risk related to the postal services and its future EBIT performance is somewhat elevated due to this transitional process of this entire post-letter delivery method. So we see that this is kind of limiting the multiple expansion and given that we expect some four percent EBITDA growth and neutral valuation and ten percent dividend yield, we see that the overall return is on a good level and that is one reason why we are currently on an Accumulate recommendation.

Okay, thank you very much, Arttu. So Posti, a newcomer on Nasdaq Helsinki with at least for a few years to come high dividend yields. You can read more at inderes.se and if you have any questions you can ask them at our discussion forum directly. directly to Arttu.