Declining Mail Volumes And Mounting Cost Pressures Will Strain Operations

Key Takeaways

• Declining mail volumes, labor cost inflation, and regulatory headwinds threaten earnings stability and place pressure on both revenue and margins.
  
• Expansion into parcels and automation increases capital demands, weakening cash flow and elevating risks to deleveraging and dividend sustainability.
  
• Strategic cross-border growth, operational efficiency gains, and sustainability leadership are strengthening margins, customer value, and long-term competitive positioning despite inflationary headwinds.

Catalysts

Provides postal and logistics services to businesses and consumers in the Netherlands, rest of Europe, and internationally.

• Declining mail volumes, driven by the persistent shift towards digital communication and billing, will create ongoing structural revenue headwinds in the Mail segment. Even with cost actions and regulatory adjustments, management recognizes the model is unsustainable at current volume levels, making long-term earnings recovery highly uncertain.
  
• Sharply increasing labor costs across the EU, combined with a tight labor market and high sick leave, are leading to significant annual organic cost inflation that must be offset with price increases. This is likely to compress net margins and create persistent earnings volatility, especially if price increases cannot keep pace.
  
• The transition from mail to parcel delivery exposes PostNL to lower-margin operations, while strong parcel growth is increasingly concentrated in large international, especially Asian, platforms. Their bargaining power and shifting channel strategies could further weaken pricing power and profitability, raising risk to both revenue and operating margins.
  
• Elevated capital expenditures, driven by ongoing investments in automation, sorting centers, digital initiatives, and cross-border expansion, will continue to pressure free cash flow and delay meaningful growth in earnings. With current free cash flow already significantly negative and additional strategic spending planned, deleveraging and dividend growth are at risk.
  
• Intensifying regulatory headwinds-including uncertainty around global trade tariffs, pending changes to universal postal service obligations, and environmental mandates-are likely to raise compliance and operational costs. These factors threaten revenue growth prospects and could result in further earnings and cash flow deterioration over the medium to long term.

PostNL Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on PostNL compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming PostNL's revenue will grow by 2.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.6% today to 1.7% in 3 years time.
• The bearish analysts expect earnings to reach €59.5 million (and earnings per share of €0.1) by about July 2028, up from €21.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the GB Logistics industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.35%, as per the Simply Wall St company report.

PostNL Future Earnings Per Share Growth

Risks

• Ongoing e-commerce and cross-border parcel growth, with PostNL reporting strong international volume increases of 19 percent and management emphasizing the strategic importance of cross-border activities, could drive sustained revenue growth and support higher top-line figures.
  
• PostNL has shown its ability to offset significant labor cost increases through effective price increases and targeted yield measures, indicating resilience in net margin and overall earnings despite inflationary pressures.
  
• Substantial progress in operational efficiency, such as network optimization, automation initiatives, and shifting toward out-of-home delivery, has already produced measurable cost savings, which can help defend net margins and partially mitigate cost headwinds.
  
• Early leadership in environmental, social, and governance (ESG) practices, as evidenced by the Platinum EcoVadis award and a perfect environmental score, positions the company to gain market share as sustainability becomes an increasingly important consideration for consumers and tightening regulations.
  
• Increasing customer engagement and data collection through the growth of PostNL accounts and digital touchpoints supports the company's ability to offer higher-value services and tailored delivery options, laying a foundation for higher long-term average revenue per user and improved profitability.

Valuation

• The assumed bearish price target for PostNL is €0.77, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of PostNL's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €1.2, and the most bearish reporting a price target of just €0.77.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.5 billion, earnings will come to €59.5 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 9.4%.
• Given the current share price of €1.0, the bearish analyst price target of €0.77 is 29.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.