The following segment was excerpted from this fund letter.
Correios De Portugal, S.A / CTT (OTCPK:CTTOF)
We could say the same for CTT, which is entering its 504th year as an organization. Operating profit is set to hit a company record in about a year’s time, given the capital markets day guidance of €100-120 million in EBIT in 2025. Besides this figure being a new company record, what’s more compelling is that the majority of it will be made up by profit drivers that didn’t exist when we entered the board room in 2019.
A highlight of the year for me was in December, when a union called a strike during the busiest moment of the year. Zero employees showed up for the strike, outside of the 6 union leaders that called for it. This strike was called just as a new customer-satisfaction bonus scheme was in the early phases of being trialed. The company has been working on preparing data and processes for years to get to this point. It already has the leading position in on-time delivery in the entire market, but the company is pushing the bar even higher. While most employees feel a sense of ownership over the company and its brand, this incentive scheme will bring that commitment to a new level by continuing to prioritize the customer experience.
This also is starkly contrasted to competitors that are owned by venture, government or short-term oriented investors. A great example of this was in 2021-2022, when VC-funded Paack, government-funded Correos, and Royal Mail-owned GLS were attacking the Iberian market with price points that carried with them deeply negative gross margins. All three were fighting to “dress up” short-term results through unsustainable price points.
As Royal Mail pulled the GLS IPO, Correos posted a negative result for its sole profitable segment of Express & Parcels, and Paack’s venture-funding has evaporated, so has the sustainability of these competitors. As CTT held price and reinvested in quality of service throughout the heat of the moment, it has re-accelerated its market share conquest on the Iberian Peninsula. E-commerce ordering frequency in Iberia is still fractions of where it has hit in other developed markets, meaning the profit drivers from this core division are sustainable and secular in nature.
Thus, the accelerated revenue growth rate demonstrated in recent results has sustainable profit drivers underpinning it. Furthermore, according to consensus estimates, EBITDA from 2023 will hit a new company record when its reports full year financials. The stock remains 65% below its levels when it last reported a smaller number in 2016. The story is far from being over, and our suspicion is that the new record will not be the peak, as the company’s medium-term guidance promises more by 2025.
The EBIT guidance of €100-120 million would support a market capitalization of €1.0-1.2 billion at peer valuations. These peers are not growing nearly as fast as CTT, so this is even conservative. The only question that remains is how many shares the company can retire between now and then, from the current 138.9 million left outstanding. Every day that goes by with it trading for less than half of fair value means the share count will likely be considerably less.
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