The revitalisation of Australia Post under Ahmed Fahour hasn't been quite as spectacular as the profit result he unveiled suggests at first glance, but there's little room for doubt now that he has done what he was asked to do when he took over as managing director in February 2010.
Fahour's brief was to devise a new business model for Australia Post that coped with the rise of the internet, and the accelerating decline of physical mail volumes that was accompanying it. His key decision was to accelerate a shift by the group towards the delivery of packages, a business that is actually strengthened by the internet, and he's executing effectively enough to give the group a future, and make it a privatisation candidate.
The decline of what is now known as "snail mail" is continuing. Physical mail volumes are falling at a rate of 5 per cent a year, and are down 17 per cent since 2008. About 90 per cent of what remains is business mail that will increasingly be delivered electronically.
Quite a bit of it will be delivered on new digital mailbox platforms that Australia Post and its rival in that service, Computershare are rolling out, but even if Australia Post wins the lion's share, losses on traditional mail services that must be maintained under Australia's Post's service charter will continue.
The division that houses Australia Post's traditional mail delivery operation saw its losses increase by 15 per cent to $146.5 million in the year to June. Revenue fell by 1.3 per cent, and costs rose as another 200,000 delivery points were added to meet the group's community service charter.
The parcels and express division boosted earnings by 17 per cent to $361.5 million and revenue by almost 13 per cent however, underpinned by the growth in online shopping, and Fahour has just significantly expanded the group's market share by paying $408 million to buy Qantas out of the StarTrack parcel express joint venture.
With StarTrack included on a wholly owned basis, parcels and express is now the group's biggest business, accounting for 43 per cent of total group revenue in the year to June, up from 31 per cent in the previous year. The traditional mail business's revenue share is down from 46 per cent to 37 per cent on the same basis.
Australia Post's 4428 retail outlets also performed solidly, earning $182.5 million on 3 per cent higher revenue, but the growing parcels delivery business was the reason Fahour was able to announce a 2.8 per cent increase in group revenue, and a 16.6 per cent jump in group earnings, to $281 million.
Australia Post's shift towards packages isn't confined to the packages and express division itself, which deals with business-to-business and business-to-consumer carriage. The group's retail outlets are also becoming more parcel-focused. By Christmas, 120 of them will have new parcel lockers installed, for example.
Fahour is boosting maintenance and expansion spending by the group by about 50 per cent to $2 billion over the next four years, and the focus on parcels and express shows up in that division's $1.2 billion share of the purse, including the $408 million that is being spent to take Qantas out of the StarTrack parcels express business and make it a wholly owned subsidiary.
StarTrack is an important deal for Fahour because with full ownership Australia Post is the biggest player in the parcel express market, with a share of about 35 per cent. Toll follows with about 30 per cent, and TNT has about 20 per cent.
It's a very competitive business, but it is growing quickly. Australia Post's parcel volumes have risen by 24 per cent in three years, and Fahour expects they will rise at a compound rate of 10 per cent a year between now and 2020. That would only be on the back of a lift in online retail sales to about 10 per cent of total sales, he says, a level the US has already reached.
The business is a mix, and a balance of them. It's got that slowly dying snail-mail operation too. But Fahour is creating a growth story that makes the group a floatable prospect, should a government be looking for ways to raise money, as this federal government is, and any new one will be.
Australia Post's profit translated by the way to a return on (Commonwealth) equity of 18.7 per cent, up from 13.4 per cent a year earlier.
That's the same return that the nation's most profitable bank, CBA, posted this year, but Australia Post's underlying ROE is a bit lower. The retained earnings component of its shareholders equity fell by $379 million during the year, as Commonwealth bond yields fell, and the accounting guesstimate of the group's future superannuation liabilities rose. The Commonwealth bond yield determines the discount rate that is used to value the future liabilities, and because the discount rate is lower, future liabilities are being discounted less heavily.
Commonwealth bond prices will fall and the yield on the bonds will rise if Europe's sovereign debt crisis eases and solid global growth resumes, as overseas money that is hiding in Australian Commonwealth bonds is repatriated. At that time retained profits and shareholders' equity will be bumped up again, as the value of future superannuation liabilities is once again discounted more aggressively.
If we assume that does happen (to assume it does not is to assume that the world will not recover from the financial crisis) Australia Post's previous shareholders' equity of $1.8 billion is the better benchmark. Against it, Fahour has delivered a return on equity of 14.5 per cent: still good, but not up there with CBA's return, at a level that actually attracts accusations of gouging.
mmaiden@theage.com.au
Frequently Asked Questions about this Article…
What was Ahmed Fahour’s strategy to revitalise Australia Post and why does it matter to investors?
Ahmed Fahour shifted Australia Post from a mail-focused business toward parcels and express delivery, investing heavily in the parcels network, expanding retail parcel services and buying full ownership of StarTrack. For investors this matters because the move creates a clearer growth story—parcels are growing with online shopping while traditional mail is declining, improving earnings and making the group more “floatable” as a privatisation prospect.
How fast are physical mail volumes declining and how does that affect Australia Post’s results?
Physical mail volumes (the article calls it “snail mail”) are falling about 5% a year and were down 17% since 2008. That decline has increased losses in the traditional mail division (losses rose 15% to $146.5 million in the year to June), reduced revenue and raised per-item costs due to service commitments—factors investors should watch when assessing long‑term profitability.
How significant is the parcels and express business for Australia Post’s revenue growth?
Very significant: the parcels and express division boosted earnings 17% to $361.5 million and revenue almost 13%, driven by online shopping. After bringing StarTrack onto a wholly owned basis, parcels and express accounted for 43% of group revenue (up from 31%). Parcel volumes rose 24% over three years and management expects about a 10% compound annual growth rate to 2020, underpinning future revenue growth.
What did the StarTrack acquisition mean for Australia Post’s market position and investors?
Australia Post paid $408 million to buy Qantas out of the StarTrack joint venture, making StarTrack a wholly owned subsidiary. That deal made Australia Post the largest player in the parcel express market with about a 35% share (compared with Toll ~30% and TNT ~20%), strengthening market position and supporting the company’s growth story for potential privatisation or investor interest.
How did Australia Post perform financially and what do the reported returns mean for shareholders?
Group revenue rose 2.8% and group earnings jumped 16.6% to $281 million in the year to June. The reported return on Commonwealth equity was 18.7% (up from 13.4%), though an alternative benchmark using earlier shareholders’ equity gives an ROE of about 14.5%. Investors should note retained earnings fell by $379 million, largely due to lower Commonwealth bond yields increasing the accounting value of future superannuation liabilities.
What operational changes are Australia Post making in retail outlets to handle parcel growth?
Australia Post’s 4,428 retail outlets earned $182.5 million on 3% higher revenue and are becoming more parcel-focused. The group is installing parcel lockers—about 120 outlets were scheduled to have new parcel lockers by Christmas—and directing more retail investment toward handling increased parcel volumes.
What are the main risks investors should consider in Australia Post’s shift to parcels and potential privatisation?
Key risks include the continuing losses in the traditional mail business and service‑charter obligations, intense competition in the parcel market, and the company’s reliance on online retail growth to hit projected parcel volume targets. Financially, movements in Commonwealth bond yields affect the reported equity position and liability valuations, which can influence headline returns—factors investors should weigh carefully.
Will growth in online shopping be enough to sustain Australia Post’s parcel growth forecasts?
Management expects parcel volumes to grow at about a 10% compound annual rate to 2020, but this projection assumes online retail rises to roughly 10% of total sales (a level the US had already reached). Continued expansion in online shopping is therefore a key driver of parcel growth—if online retail strengthens as expected, it should support Australia Post’s parcel-led growth story; if not, growth could be weaker than forecast.
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