Delivering parcels to so called parcel machines instead of to the door of the receiver is a major growth story. Coming with benefits for all parties, this win-win concept has not only transformed many big (former) state-owned postal businesses by infusing some new growth into them. It has also created a Polish company that has specialized exactly on this business without operating capital-intensive logistics or legacy mail. It is rolling up many European markets full-steam. The last coup: a takeover in the UK, the continent’s biggest e-commerce market. Is InPost’s stock a must-own?

Summary and key takeaways from today’s Weekly
– InPost is rolling up the Western-European parcel delivery market.
– Interesting growth story with strong execution so far. The cherry on the cake is the recent takeover announcement in the UK.
– However, the stock is expensive with some other negatives which led me to pass on this one.

My German readers will be familiar with DHL Group’s (ISIN: DE0005552004, Ticker: DHL) yellow “Packstationen” which are automated parcel machines, often placed in well-trafficked areas.

Since 2003, the former Deutsche Post Group (now “DHL” as their German mail segment is just a legacy business with a minor share of the whole) has started to install these machines, being the pioneer on the German market. Due to having been well-received by end customers, a growth story for the company has emerged.

The latest number I came across is more than 13,500 such machines (see here).

The benefits are clear: for the company which is the exclusive operator but also the parcel carrier, it is primarily cost and time efficiencies due to reducing the expensive last-mile. It is said that the delivery to the door causes give or take 30% of the entire delivery costs. Even more if people and their neighbors aren’t at home, forcing the deliverer to take the parcel back again.

For the end consumer the big advantage is that the parcel is delivered to a central pickup point where it can be placed and collected 24/7. No immediate time pressure and maximum flexibility without having to drive to the post office that might not be on one’s way. Not to mention that many such post offices are currently being closed and consolidated, at least here where I live.

The other way around, it is also possible to print sending labels and send parcels via these machines. Just scan it, click a few times on the screen and put it in.

Personally, I am a frequent user, primarily as a sender. 🙂

Being a conglomerate with several other businesses and at least currently no international growth ambitions in this regard, it is a nice service in Germany, but not further interesting from an investment perspective. At least not at the moment.

However, there’s a Polish company called InPost (ISIN: LU2290522684, Ticker: INPST) which has specialized on exactly this niche, namely the revolution of the last-mile parcel delivery. In its home market, the company is the dominant player. With its strong cash flows, the group has financed its international expansion into several Western-European countries (excluding Germany!).

The stock has tripled since early-2022 and is within reach of its all-time high.

Just recently, InPost announced a major coup by acquiring a British business which gives it full control of the entire value chain. As the UK is Europe’s biggest e-commerce market, this is a strong sign.

Today, we’re looking at the stock of InPost.

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Pan-European growth story

I think I am not telling anybody any great news by saying that e-commerce and parcel delivery have been a growing business with likely more to come. Basically, this relates to every country. Market penetrations and growth rates might be different, but the underlying trend shows in the same direction.

In Poland (where I have my roots) the postal and parcel business in the past was state-exclusive. The private company InPost has transformed the market. Started as a simple flyer distributor in 1999, after the liberalization of the market, in 2006 InPost became a postal operator and later in 2009 installed the first parcel locker in Poland.

By 2018, more than 4,000 such APMs (automated parcel machines) have been installed in Poland. Just two years later, the number more than doubled. As we’ll see later, until today there has been another double or 6x since 2018.

Speak of explosive growth!

By the end of 2023 and thanks to some acquisitions, in total InPost owned and operated more than 35,000 units spread over all its markets in Europe.

In the meantime in 2021, InPost was floated publicly via the Amsterdam stock exchange. Besides the founder who’s still on board as CEO, the company has been backed by private equity money. A bit more than half of the shares are still held by investment firms PPF Group, A&R Investments, Advent International and GIC Private.

Officially, the company is incorporated in Luxembourg, but due to having started as a Polish business and still generating basically all its free cash flow there through its local subsidiaries, I prefer to see it primarily as a Polish company.

As per last count and including the first half-year of 2024, InPost operated more than 40,000 APMs in total, of which 23,000 are located in Poland. You can see below that no other country currently comes close to this number. These 23,000 units are around twice the amount of what we have in Germany – with double the population!

Besides APMs, there are also PUDOs – pick up drop off points – which are strategically important places like supermarkets, convenience stores, small local businesses or transport hubs where parcels can be picked up or send on their trip.

There are more than 32,000 such points in addition to the APMs making for almost 75,000 out of home delivery options.

When you consider (theoretically) that they serve a total population of more than 300 mn. people, it becomes apparently clear how much the complexity gets reduced in comparison to having to deliver each and every parcel to the recipient’s door – even if just a part of it is used!

After acquiring Mondial Relay in France in 2021 and a 30% stake in Menzies in the UK in 2023, it is clear that this adventure does not stop domestically in Poland. InPost has spread its reach likewise into Italy, Spain, Portugal and the Benelux countries, but France and especially the UK will be key growth drivers for the foreseeable future.

The international, pan-European expansion is in full swing.

The core markets are Poland, France and the UK. In all of them, InPost is growing above market rates, i.e. it is winning market share against the competition rather quickly. This proves that the service is well-received.

InPost controls the entire value chain, but it differs insofar as it does not bring parcels to the door of the consumer which as described in the intro section saves lots of costs.

While of course not everyone likes to go outside to pick their parcel, in Poland so far the overwhelming majority has responded very positively.

InPost’s APMs are the most preferred delivery but also sending method – by a wide margin. Its net promoter score rating shows an excellent value of 80 which is considered to be very good, expressing the high satisfaction of the users.

This successful adoption has resulted in a booming business.

InPost’s total sales have grown by 49% between 2017 and 2023, while EBITDA (not my preferred figure) as a measure of operating profitability before investments and a proxy for operating cash flow has even jumped by 89%, i.e. disproportionately. EBITDA margins have grown from a meager 11% to almost 50%.

My longer time readers know that I want to see sales translated into cash flows.

On this front, InPost has been able to prove its business to be working as not only operating profits climbed, but also operating and even free cash flows.

Per last count, the free cash flow margin was even in the double digits.

Equipped with a strong operating cash generation from its home market, InPost went first on a shopping spree in France where it bought Mondial Relay, a business which had quite a few PUDOs, but not a single APM!

After the takeover, InPost started to restructure and reorganize the business while launching APMs. Until today, PUDOs almost doubled while APMs increased from zero to 7,000 units with likely much more to come.

Per last count, the French business contributed 28% to total sales, but only 14% to EBITDA (margin of 17%). In contrast, the Polish business stood for 60% of sales, but 82% of EBITDA and even all free cash flows.

This is okay as France is behind where Poland is for InPost. The progress is noticeable, though.

While growing the French business, InPost has been investing in the UK via a 30% equity stake in the local company Menzies. The UK is important, because it is indeed Europe’s biggest e-commerce market with a volume of 280 bn. USD.

The reason why the UK is even ahead of Germany is the much higher market penetration. While the UK saw a penetration rate of 78%, the figure for Germany is just 60%.

In 2022, the UK had 5.1 bn. delivered parcels, while in Germany the volume was only 4.2 bn. – despite its population being a good third bigger (see here).

Another reason for the expansion in the UK will very likely be the already strong position of DHL with its “Packstationen” in Germany, thus InPost focusses on the markets where the competitive situation is more favorable for them.

That said, a week ago InPost made a blockbuster announcement.

InPost bought the remaining 70% of Menzies it did not own for 60 mn. GBP or ~310 mn. PLN which is just a fraction of the free cash flow of the last twelve months.

The company bought the Newstrade (newspaper and magazines delivery) and Express (parcel delivery) subsidiaries, but did not acquire the warehousing and linehaul transport business (MDS) which would be capital intensive to operate.

InPost will continue to hold a 30% stake of MDS like it did before as it is non-strategic.

The rationale for the deal is clear.

With especially the parcels business of Menzies now fully swallowed, InPost will not only be bigger but it will gain more control of its operations, including a full vertical integration.

Soon, a new one-day-delivery premium option is envisioned to be launched.

Before the buyout, InPost had an estimated market share of ~15% in the UK when doing a back-the-envelope calculation of 41 mn. parcels (~80 mn. on an annualized basis) in relation to the before mentioned 5.1 bn. parcels.

I am expecting InPost to go full-throttle now to capture as much market share as possible. UK and Italy until here have been shown only on a combined basis in the financial statements. This should change soon. The last numbers showed a contribution to sales of not even 12% from both countries taken together and an EBITDA margin of just 10%.

Plenty of room to grow and improve for Europe’s biggest e-commerce market! Besides the UK, it is only logical that InPost will target Ireland as the next market to enter where it has currently no presence.

So much on the background and recent developments. What about the stock?

InPost’s shares trade on the Amsterdam stock exchange. The current share price is ~18 EUR which translates into a market capitalization of 39 bn. PLN or 9 bn. EUR with 500 mn. shares outstanding. Daily average trading volume is 7–8 mn. EUR, thus liquid enough, despite less than 50% being in free float. The stock trades in EUR, but the accounting is in PLN (factor of 4.3).

The company has a net debt position of 4.2 bn. PLN or roughly a billion EUR, resulting in an enterprise value of ~10 bn. EUR.

Free cash flow over the last twelve months was 1.5 bn. PLN or 350 mn. EUR. This translates into a current EV / FCF of almost 30x which seems expensive. Growth rates have been high with above 20% for parcel volumes and sales (EBITDA higher) even until recently.

At this pace, the company could double in 3.5 years. I think it is even achievable, given the strong execution so far. It would halve the current 30x multiple, making it a more justifiable investment – if everything went right.

On top, the founder-CEO who does not hold even 0.2% of “his” company, earlier this year bought a staggering 2.7 mn. EUR of shares in the open market. That’s a very strong sign of confidence.

But why am I hesitating?

Four points: the still high private equity exposure, the high cyclicality of the business, the debt load and little room for errors.

If it were a guaranteed trade – something that does not exist – and the underlying business would indeed double in 3.5 years or even less, I’d consider this a worthwhile investment. But the high pace must be kept up which I deem a bit risky to take for granted with major economies slowing down.

I do not like too much private equity exposure as they usually load off their shares at high prices to realize gains, not at cheap valuations to make gifts to retail investors. It happened with the IPO into a booming environment.

The stock is approaching its all-time high from the IPO.

It was clearly overpriced back then as this was before the expansions into France and UK. Now, the multiples look much better as the business is bigger and higher-margin. But as said parcel delivery and consumerism are cyclical. I am a bit afraid of a potential slow-down in business activity.

With a ~30x multiple for a cyclical business, the stock is prone to correct sharply, because expectations are already high. Priced for success as they say.

But this one goes on my watchlist. I like the overall development. However, I clearly need much more of a margin of safety. Speaking of safety, the net debt load – a gift from private equity – is 3x free cash flow. While not imminently dangerous, I do not want to travel around with this ballast.

Watchlist yes, buying now no!

Conclusion

InPost is rolling up the Western-European parcel delivery market.

Interesting growth story with strong execution so far. The cherry on the cake is the recent takeover announcement in the UK.

However, the stock is expensive with some other negatives which led me to pass on this one.

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