Fahour's strategy wins the stamp of approval

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.

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.

Australia Post's 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 a share of 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.


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