Investor Presentation • Jul 24, 2018
Investor Presentation
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CTT - Correios de Portugal, S.A. 24 July 2018
This information to the market and the general public has been prepared by CTT - Correios de Portugal, S.A. (the "Company" or "CTT") and is made under the terms and for the purposes of article 248 of the Portuguese Securit legislation in force and is also available on CTT's Investors Relation website at http://www.ctt.pt/ctt-e-investidores/relacoes-com-investidores/comunicados.html?com.dotmarketing.htmlpage.language=1.
This document has an informative nature and does not constitute, nor must it be interpreted as, an offer to sell, issue, exchange or buy any financial instruments (namely any securities issued by CTT or by any of its subsi solicitation of any kind by CTT, its subsidiaries or affiliates. Distribution of this document in certain iurisdictions may be prohibited, and recipients into whose possession this document comes shall be responsible for i observing any such restrictions. Neither this document nor any part of it constitutes a contract, nor may it be used for incorporation into or construction of any contract or agreement. Should anyone intend to acquire or s related to CTT, at any time, any transaction or investment shall be made on the basis of its own judgement and of professional advice and this document shall not be deemed or perceived as any kind of financial or other adv
This document (i) may contain summarised information and be subject to amendments and supplements, and (ii) the information contained herein has not been verified, reviewed nor audited by any of the Company's advisors or a required by applicable law, CTT does not undertake any obligation to publicly update or revise the information contained in this document. Moreover, the recipients of this document are invited and advised to consult the pu CTT on its website (www.ctt.pt) as well as on the Portuguese Securities Exchange Commission's website (www.cmym.pt). In particular, the contents of this document shall be read and understood in light of the financial infor time to time by CTT, through such means, which prevail in regard to any data presented in this document.
To the fullest extentallowed by law, neither the Company nor its subsidiaries, affiliates, directors, employees or advisors assume liability of any kind, whether for negligence or any other reason, for any damage or loss a use of this document or its contents.
This presentation contains forward-looking statements. All the statements herein which are not historical facts, including, but not limited to, statements expressing our current opinion or estimates or, as applicable, thos financial performance, the business and strategy, the management plans, targets and objectives concerning future business, operations and investments are forward-looking statements. Statements that include the words "expec "estimates", "targets", "foresees", "predicts", "intends", "plans", "believes", "anticipates", "will", "may", "would", "could", "continues" and similar statements of a future or forward-looking nature identify forward-look
All forward-looking statements included herein involve known and unknown risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results, performance or achievements to diff indicated in these statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Any forward-look documentreflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the results of our financial condition, strategy, operation and liquidity, economic, legal or technological trends or conditions (specifically, market and sector developments, investment opportunities and regulatory conditions).
Although CTT believes that the assumptions behind such forward-looking statements are reasonable when made, any third parties are cautioned that forward-looking information and statements are subiect to various risks and u of which are difficult to predict and generally beyond the control of CTT, what could cause the models, objectives, targets, plans, estimates and/or projections to be materially reviewed and/or actual results and developme those expressed in, or implied or projected by, the forward-looking information and statements.
Forward-looking statements (in particular, the objectives, targets, estimates and projections as well as the corresponding assumptions) do neither represent a commitment regarding the models and plans to be implemented, no of future performance, nor have they been reviewed by the auditors of CTT. You are cautioned not to place undue reliance on the forward-looking statements herein.
All forward-looking statements included herein speak only as at the date of this document. Except as required by applicable law, CTT does not undertake any obligation to publicly update or revise any forward-looking statem of new information, future events or otherwise.
CTT strategy: transform the postal business and continue to develop its growth levers Express & Parcels and Banco CTT...
CTT is pursuing a diversification strategy...
... notably through the development of Banco CTT
Preserving the value of the Mail business through the implementation of a sizeable Operational Transformation Plan to improve profitability, reinforce quality of service and sustain the mid-term transformation of the Company
Consolidating CTT's positioning as a strong and integrated Iberian CEP operator, leader in the last mile distribution in Portugal, leveraging on the e-commerce growth trend
Developing an innovative and fast-growing retail banking player focused on simplicity, transparency and proximity
... that will be accelerated with the acquisition of 321 Crédito, a high-performing and profitable specialised consumer credit business operating in a very attractive market
Specialised consumer credit institution, focused on lending for the purchase of used cars by retail clients through a network of car dealers
Net Loan book of c.€250m, of which c.93% used auto loans and new production volume of €133m in 2017 (c.€80m new production and >€300m Net Loan book in 1H18)
Top-5 player with a market share in 2017 of 9.2% (up from 7.5% in 2016), in a market of c. $\epsilon$ 1.4bn1, with strong growth dynamics
Net profit of €7.9m in 2017 (25.2% RoAE), expected to grow to c.€9m in 2018, based on higher expected used auto loan production
Target 2020 Net profit contribution from 321 Crédito post-acquisition $(\epsilon m)$
| Financial terms of the acquisition |
Acquisition by Banco CTT of 100% of 321 Crédito's shares for a price of $\epsilon$ 100m, paid in cash at completion Post-completion price adjustment mechanism to capture regulatory capital variation 1 from 31 Dec 2017 until verification of a set of conditions precedent, such as customary banking and competition regulatory approvals Immediate application at completion of Banco CTT's existing liquidity to fund part of 321 Crédito's Net loan book via Shareholder Loans, the principal of which at the date hereof amounts to $\epsilon$ 30.6m Closing of the transaction is expected to occur during 1Q19 |
|---|---|
| EPS-accretive transaction for CTT |
Acquisition aligned with CTT's strategy to find additional sources of value, diversifying and increasing the growth potential of its portfolio Expected positive contribution from Banco CTT to CTT's consolidated EBITDA already in 2019 EPS-accretive transaction: $>25\%$ accretion 2 over CTT's 2017 EPS with a target 2020 ROIC 3 of c.14% Implied 10.0x P/E FY18 PF with funding synergies 4 below the average trading P/E of consumer finance peers of $14.4x^{5}$ CTT maintains capacity to pursue future growth opportunities in other business units, especially in Express & Parcels |
1 Regulatory capital variation corresponds to the fully implemented Common Equity Tier 1 (CET 1) capital of 321 Crédito. Assuming closing on January 1st, 2019, subsequent price adjustment mechanism estimated at c. £10m: impact in the accounting of provisions flowing through reserves and other accounting movements.2 Earnings per share accretion. Defined as incremental Net profit per CTT share over CTT 2017 EPS.3 Return on Invested Capi total price.4 Considers c.C10m for subsequent price adjustment mechanism, assuming closing January 1st 2019. PF stands for proforma, considering potential fully-loaded funding synergies of E2m.5 Based on 2018 earning 20% (includes Credit Acceptance Corporation, Provident Financial plc, Ferratum, Enova International. Peers data as of market closing 23d July 2018, Bloomberg.
| $\odot$ Acquire a consumer credit platform |
Complements Banco CTT's retail banking offer, enabling a more complete and diversified credit product offer $\bullet$ Provides Banco CTT with specialised credit underwriting capabilities that can be expanded into other credit segments Experienced management team with average tenure of c.15 years in the company, with proven market know-how • Limited integration risk, given simplicity of product, systems and processes of 321 Crédito |
|---|---|
| Optimise BCTT's balance sheet |
Applies liquidity from Banco CTT's low-cost deposit base into a higher margin consumer lending business, increasing the bank's loan-to-deposit ratio and replacing 321 Crédito's more expensive wholesale funding Broadens the options for Banco CTT to profitably deploy capital, providing flexibility in terms of portfolio management (e.g. maturity, asset class, risk and return) |
| Accelerate BCTT's revenues and profitability |
Sizeable, profitable and fast-growing consumer credit platform, with attractive risk-adjusted returns Banking product of >€16m in 2017, corresponding to >60% growth vs. 2016 Loan production in 1H18 of c.€80m, which represents an increase of c.33% vs. 1H17 Expected Net profit contribution from 321 Crédito of c.€15m by 2020 |
| Expand market presence |
A new distribution channel (point-of-sale) comprised of >1,200 car dealers $\bullet$ Potential for cross-selling of Banco CTT's products (on a client base with a similar profile) Potential upside contribution from CTT / Banco CTT footprint and commercial capabilities to increase market share of 321 Crédito (currently c.10% 1 ) |
1 Includes customers with personal credit outstanding.
2 Banco CTT considers credit products placements, including credit placed by Banco CTT on its own Balance Sheet and the total gross outstanding balance of credit placed by Banco CTT branches (outside Banco CTT's Balance (Cetelem). 3 Last twelve months
Banco CTT's key financial targets1
bancoctt crédito Soluções
Crédito
Especializado
| . $\tilde{\phantom{a}}$ |
|
|---|---|
| Positive EBITDA contribution | 2019 |
| Positive Net profit | 2020 |
| Additional capital until 2020 2 | c.€20m |
| ROE long-term aspiration | c.15% |
| Dec. 2014 |
Acquisition by Firmus, a company controlled by Cabot Square Capital (UK Private Equity) |
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|---|---|---|---|---|---|---|---|
| Jun. 2015 |
Restructuring, including adoption of the brand 321 Crédito, update of strategy and positioning, reorganisation of the team, paving the way for future growth |
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| Refinancing & First Public Securitisation, access to market funding as a Jul. 2017 key milestone given business model characteristics (i.e. no deposit-taking) Ulisses 1: First public securitisation after the acquisition by Firmus Chaves 7: Private warehouse facility with two leading global banks $\bullet$ Market shares 6 - used auto loans (production) |
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| Origination volume (Used auto loans; € million) | 5.6% | $7.5\%$ | |||||
| 147 | Decision to hold production in 2014, pending completion of acquisition 7 |
51 | $+62%$ CAGR 87 |
133 | |||
| 2010 | 2014 | 2015 | 2016 | 2017 |
1 Association of Specialised Credit Institutions (Associaçãode Instituições de Crédito Especializado). 2 Gross yield, excludes ancillary yield (e.g. insurance commissions, prepayment fees, etc.). 3 Figures based on N 4Calculated as per EBA's (European Banking Authority) definition: Non-performing loans and advances to customers divided by total loans and advances to customers (gross).
5Calculated as per EBA's (European Banking Authority) definition: accumulated impairment on loans and advances to customers / total non-performing loans and advances to customers (gross). 6 As per ASFAC
... which has experienced significant growth since its restructuring and the stabilisation of the Portuguese economy
1 Excludes D&A. 2 Provisions & impairments as per 2016-17 statutory accounts. Positive impact on P&L due to NPL recoveries.3 Net interest margin and commissions divided by average net loan book. 4 Provisions & impa average Net loan book. Negative value corresponds to positive impact of provisions & impairments on P&L.5 Defined as Net profit divided by the average Equity of the year.6 Annual figures as per Annual Reports and half-
Product: dealer point-of-sale loan whereby customer receives a loan explicitly linked to an auto transaction
Ticket: average ticket originated in 2017 of c.€10.5k
Collateral: lender retains a right over the vehicle (in case of default it is expected that c.60% of outstanding debt amount could be recovered1), contributing for historical LGD levels of c.30%-40%
Controlled risk: auto credit is a top priority for households (after mortgage), maximum total indebtedness (DSTI 2) on origination of 50%, impact of default on customers' credit track record, and relatively low tickets, have ensured historically low default levels
1 Based on historical data. 2 Debt service-to-income ratio (DSTI) corresponds to the ratio between a borrower's total monthly debt installments (associated to all credits) and monthly income, net of taxes and mandatory c $13$ 3 Cost of risk of -0.6% (as per statutory accounts) including NPL recoveries.4 Benchmark of consumer finance peers includes Credibom, Cetelem, Santander Consumer Finance, Banco Primus, BBVA Consumer Finance.5 Benchma Depósitos, Santander Totta, Millenium BCP, BPI, Montepio; Source: Annual Reports.
The integration of 321 Crédito provides an additional credit product line to Banco CTT's model, with improved prospects for returns on risk-weighted assets...
15
Acquisition of 321 Crédito significantly increases Banco CTT's Net $\bullet$ loan book and adds options in terms of capital allocation and portfolio management
Introduction of used auto loans in the product portfolio allows $\bullet$ Banco CTT to deploy capital in a segment with higher risk-adjusted returns
17
Transaction key financial highlights
2020 target ROIC of c.14%, significantly above CTT's cost of capital
| P/BV multiple | consistent with the high RoAE profile of 321 Crédito | ||||||
|---|---|---|---|---|---|---|---|
| 2.4x | c.22.5% | ||||||
| FY18E | FY18E | ||||||
| $P/E$ multiple below those of listed consumer finance peers $3$ | |||||||
| 14.4x | Peers with RoAE > 20% 4 |
||||||
| 12.2x | |||||||
| 10.0x | PF funding synergies 1 |
7.3x | 8.0x | Peers with RoAE < 20% 5 |
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| FY18E | 2020 Net profit target contribution 2 |
Listed consumer finance peers |
Note: Assuming closing on January 1st, 2019, considers c. £10m for subsequent price adjustment mechanism.
1 Considerspotential fully-loaded funding synergies of €2m.2 Based on 2020 Net profit target contribution of c. €15m.3 Listed peers data as of market closing 23rd July 2018, Bloomberg.
4 Selected listed consumer finance businesses with 2018ERoAEabove 20% (based on 2018E earnings consensus as per Bloomberg and assuming 50% dividendpayout), which includes: Credit Acceptance Corporation, Provident Financial 5 Selected listed consumer finance businesses with 2018ERoAEbelow 20% (based on 2018E earnings consensus as per Bloomberg and assuming 50% dividendpayout), which includes: Santander Consumer USA, Ally Financial, Consumer P
Contacts: Phone: +351 210 471 087 E-mail: [email protected]
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