We believe fears of what mail liberalisation might mean to
incumbent operator margins and profits are overblown. What really
matters today is their strong cash generation. Acquisitions is one
use of funds, but so too are share buybacks.

Mail market fears overdone
The current low PE of the postal sector reflects market fears of mail market
liberalisation. We believe this is overdone and see no near-term collapse in margins.
We believe current PER valuations imply a 40% loss of domestic market share post
2009 for both TPG and Deutsche Post. This reflects a degree of increased
competition that is unrealistically pessimistic. Competition will increase, but it will not
be as catastrophic as valuations imply.
Eyes on cash flow
The key point to us is that TPG and Deutsche Post are generating significant cash.
Market share loss in the medium term should be minimal and over the next four
years the companies should generate c40% of the existing market cap in cash. This
should be more than enough to fuel acquisitions and increase shareholder returns via
share buybacks.
TPG (Buy, target price: €26.2, 32% upside)
Fundamentals remain positive and we look to strong cash flow generation as a
catalyst for the equity story. We expect TPG to generate €3.0bn, or c33% of its
market cap, of free cash flow over the next four years, providing adequate scope for
acquisitions and a share buyback. With a fixed gearing of 20%, we believe a
buyback may boost 2005-12F EPS CAGR by 7%, to 14% pa.