The Treasury Valuation of New Zealand Post Group 4 October Reliance Restricted

Transcription

1 The Treasury Valuation of New Zealand Post Group 4 October 2013 Reliance Restricted

2 Contents Executive summary 3 1. Executive summary... 4 Company performance 7 2. Company performance Sensitivity analysis Sensitivity analysis Appendices Appendix A: Abbreviations Appendix B: Comparable companies Appendix C: Limitations and disclaimer ii Reliance Restricted

3 Executive summary 1. Executive summary 3 Reliance Restricted

4 Executive summary Executive summary Executive summary Executive summary This report provides an estimate of the value of equity in the New Zealand Post Group (NZ Post) as at 30 June Recent performance NZ Post has provided postal services in New Zealand for over 170 years. Until recently the delivery of mail has been the primary role of the business. Since the launch of Kiwibank in 2002 this has begun to change and by FY13 Kiwibank had a 10% market share in the retail banking sector. Kiwibank reported NPAT of NZ$97m in FY13, providing the bulk of the earnings for the group. The growth in Kiwibank has coincided with a significant drop in postal volumes, from 1.1bn items per annum in 2002 to below 800m today. In FY13 letter volumes declined by 7.5%, the largest year on year decline to date. Earnings for postal services have been adversely impacted as the decline in revenue has not been offset by a corresponding reduction in costs. NZ Post acquired DHL s 50% share in Express Couriers Limited (ECL) in June 2012, moving to full ownership of ECL. ECL contributed revenue of approximately NZ$300m and NPAT of NZ$18m in FY13. Despite the difficult operating environment faced by the postal business NZ Post Group s NPAT increased (after adjusting for one-off items) from NZ$112m in FY12 to NZ$119m in FY13. Earnings outlook We forecast that Kiwibank will continue to generate the majority of the group s earnings. Our forecast assumes Kiwibank will continue to grow its retail market share, but at a slower rate than in recent years. Economic indicators are forecast to be generally positive for the banking industry with forecast growth in credit and a reduction in credit defaults, which were one of the major reasons for Kiwibank s significant impairment charges subsequent to the GFC. Earnings for the postal business will be heavily influenced by the government s response to NZ Post s proposed new Deed of Understanding. Among other things, the proposed Deed would enable NZ Post to reduce mail deliveries from six days a week to three. If the Government approves the amended Deed the company will be able to achieve significant cost savings, although the precise magnitude is not clear at this stage. If changes to the Deed of Understanding are not accepted, our analysis indicates the postal division will suffer significant losses in perpetuity. This would ultimately represent a drain on the resources of the Crown and would not be an economically rational outcome, especially since the reduction in volumes is a direct consequence of the reduction in demand for postal services. For this valuation, we have assumed the Crown will accept NZ Post s proposed amendments, and that the revised Deed will be in place by July Reliance Restricted

5 Executive summary Executive summary Executive summary Valuation Summary Currency: NZ$m NZ Post (Postal Services) Express Couriers Limited Investments Midpoint Value Methodology 117 DCF 295 DCF 140 EV/EBITDA Non-Bank Entity Value 553 Non-Bank Debt at 30 June 2013 (383) Non-Bank Surplus Assets at 30 June Non-Bank Equity Value 260 Kiwibank Ordinary Equity Value 992 FCFE NZ Post Group Ordinary Equity Valuation 1,252 Source: EY analysis We project revenue growth in the region of 2%-3% for the group between FY14 and FY16. We forecast growth in EBITDA of 3% - 5% in FY14 and FY15 due to the continued success of Kiwibank and growth in the parcel and courier market. In FY16 we project a 12.5% increase in EBITDA, resulting from the assumed restructuring of postal operations under the new Deed of Understanding. Base case valuation Our base case ordinary equity valuation of the NZ Post Group is NZ$1,252m. We have calculated this value using a sum of the parts approach reflecting the diverse operations of the group. We have valued the individual components of the business using the following methodologies: For Kiwibank we have used a free cash flow to equity approach to value total equity. We then subtract the NZ$160m of preference shares outstanding to determine the value of the ordinary equity. Postal and courier services have been valued using a discounted cash flow methodology Investments, of which Converga and Couriers Please represent the material portion, are valued using an EBITDA multiple approach. Key assumptions Kiwibank Credit growth expands at the rate of nominal GDP apart from in FY14 and FY15 where we assume the RBNZ s minimum LVR policy will reduce credit growth by 1% per annum. Kiwibank increases its market share from 10.3% in FY13 to 14.3% by FY23. Net interest margin remains relatively constant at FY13 levels of 1.81% Kiwibank s cost to income ratio decreases from the FY13 level of 68% to 60%. Postal Services NZ Post s proposed Deed of Understanding is approved by the Government and commences from 1 July We assume a NZ$30m reduction in costs as a result of the approval consistent with NZ Post s proposal to the Minister for Communications and Information Technology in January Restructuring driven by projected capex spend in the SCI results in a more variable cost structure, allowing costs to be more easily reduced as volumes decline. Letter volumes decline by 5% year on year over the explicit forecast period, in line with longer term historical trends. 5 Reliance Restricted

6 Executive summary Executive summary Executive summary Sensitivity Summary Low Midpoint High Kiwibank (Ordinary Equity Value) ,115 NZ Post (Postal Services) (80) Source: EY analysis The restructured postal operations generate an EBITDA margin that is approximately at the midpoint of comparable operations elsewhere. Sensitivity analysis We have tested the sensitivity of our valuation model to a range of assumptions and conclude the likely enterprise values of Kiwibank and NZ Post (Postal services) are within the ranges outlined in the table below: Our valuation is most sensitive to changes in assumptions relating to the postal business, particularly with respect to future costs. A +/- NZ$20m movement in annual costs has an impact of +/- NZ$197m on enterprise value. Pricing of domestic letters also has a large impact on entity value. If prices were assumed to increase by 10 cents every 3 years instead of 4, as assumed in the midpoint valuation, enterprise value increases by NZ$128m. The mid-point estimate of value is very sensitive to the valuation parameters. Small changes in the key parameters (e.g. rate of decline in volumes), result in material changes to the result. We therefore believe that, in this particular case, it is more appropriate to look at the range (-NZ$80m to NZ$314m) rather than at the point estimate of value. The Kiwibank valuation is most sensitive to the target capital adequacy ratio, (NZ$123m based on a +/- 1% movement) and the cost of equity (NZ$96m based on a +/- 0.5% movement). 6 Reliance Restricted

7 Company performance 1. Company performance 7 Reliance Restricted

8 Company performance Company performance Company performance Company overview Corporate Structure Source: Company data New Zealand Post Ltd Kiwi Group Holdings Ltd Express Couriers Ltd New Zealand Converga Group Ltd NZ Post Holdings Ltd Other subsidiaries include Main Subsidiaries Kiwibank Ltd Kiwi Insurance Ltd Kiwi Wealth Management Ltd Kiwi Capital Management Ltd The NZ Home Loan Company Ltd Main Subsidiaries Converga Holdings Ltd Converga Pty Ltd (AUS) Converga Inc (USA) Converga (ACT) Pty Ltd Converga Asia (Philippines) Converga Pty Ltd (Singapore Branch) Main Subsidiaries Couriers Please Holdings Pty Ltd NZ Post Australia Holdings Pty Ltd Couriers Please Australia Pty Ltd Express Couriers Australia (sub 1) Pty Ltd Localist Ltd Datam Ltd Reach Media NZ Ltd (50%) Airpost Ltd NZ Post Recycle Centre Ltd NZ Post Properties Ltd NZ Post Group Finance Ltd NZ Post Trust Management Services Ltd New Zealand Post operates in three core segments: physical post delivery (New Zealand Post Limited), courier and logistics services (Express Couriers Limited), and banking (Kiwi Group Holdings Limited). The group also operates the following businesses Converga Group Ltd and subsidiaries, a business solutions company (100% owned) Couriers Please Holdings Pty Ltd and subsidiaries, a courier company based in Australia (100% owned) Localist Ltd, print, digital and mobile directional media services (100% owned) Reach Media New Zealand Ltd, unaddressed mail company (50% owned) We refer to these businesses as investments in this report. 8 Reliance Restricted

9 Company performance Company performance Company performance Kiwibank Historical Income Statement Currency: NZ$m FY11A FY12A FY13A Interest income Interest expense (529) (516) (514) Net interest income Fee income Payment services fee income Gains on financial instruments at fair value Total operating income Operating expenses (218) (248) (280) Impairment losses on loans and advances (79) (35) (7) Operating earnings Depreciation (8) (9) (7) Amortisation (16) (16) (17) Net profit before taxation Income tax benefit / (expense) (11) (32) (38) Reported NPAT Source: Kiwibank Annual Accounts Kiwibank Market Share and Customer Growth Kiwibank Kiwibank was established in 2002 and is now New Zealand s largest domestically owned bank. Kiwibank operates out of 280 post shops around the country and as at June 2013 had approximately 850,000 customers. Kiwibank reported profit after tax of NZ$97m for FY13, an increase of 23% over the prior year, driven largely by growth in net interest income and a reduction in impairment allowances. During FY13 net loans and advances increased to NZ$13.2bn and customer deposits increased to NZ$12.1bn. Kiwibank s retail market share has increased from approximately 6.0% in 2007 to 10.3% in Kiwibank s NIM was 1.81% for FY13 which compares to the industry average of approximately 2.3%. The difference reflects Kiwibank s lack of diversification outside of the retail market. 93% of Kiwibank s lending was secured against residential property at 30 June The cost to income ratio for Kiwibank was 68% in FY13 which compares to approximately 45% for the major banks in New Zealand. This reflects Kiwibank s size relative to its competitors, its heavy reliance on retail customers and, potentially, the organisation structure of the group.. In FY13 Kiwibank reported net impairments of NZ$7m, significantly lower than the NZ$79m reported in FY11 and NZ$35m in FY12. The FY13 amount reflects the write back of previously impaired loans, and is therefore not necessarily representative of likely future impairment levels. Kiwibank s operations also include: Source: Kiwibank Investor relations , Kiwi Wealth Management Limited, which primarily provides Kiwisaver investments (previous Gareth Morgan Investments) 800, , Kiwi Insurance Limited, which provides insurance services The New Zealand Home Loan Company,which provides mortgage services Number of customers 600, , , , Main bank share % 200, , FY07 FY08 FY09 FY10 FY11AFY12AFY13A 0 9 Number of customers Main bank Share Reliance Restricted

10 Company performance Company performance Company performance New Zealand credit growth components Source: Reserve Bank of New Zealand % Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Major NZ Banks Mortgage Portfolio by LVR LVR - 30 June 2013 Kiwibank Westpac BNZ ASB ANZ LVR 0-80% 84% 77% 85% 79% 77% LVR >80-90% 13% 15% 8% 13% 15% LVR 90%+ 3% 8% 7% 8% 8% Total 100% 100% 100% 100% 100% Total >80% 16% 23% 15% 21% 23% Source: Kiwibank Investor Relations Presentation 2013 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Banking Sector Outlook Credit Growth Credit has grown at relatively subdued levels subsequent to the GFC. Recent growth in credit is driven primarily by housing which makes up approximately 60% of the total credit market in New Zealand. The growth in housing due to the following factors: Growth in house prices, particularly in the supply-constrained Auckland and Christchurch markets. Low mortgage rates, reflecting the low OCR, reduced bank funding costs, and competition amongst banks. Business credit growth which was negative during the period 2009 to 2011 is again positive but in the most recent periods has grown at a slower rate than housing. Since Kiwibank s exposure is mainly to housing related credit, Kiwibank has benefited relative to its competitors, at least in the short term. With the average debt to disposable income ratio currently at 160% compared with 60% in 2004, we consider it reasonable to assume credit growth will not materially exceed growth in nominal GDP over the forecast horizon, in contrast to the run-up to the GFC. LVR Loan Limits Effective 1 October, banks are required to restrict new residential mortgage lending at LVRs above 80% to no more than 10% of new lending. As at December 2012, approximately 20% of existing loans 1 had LVRs above 80%, and approximately 30% of new loans in 2012/2013 had LVRs greater than 80% 2.This data suggests the new LVR restrictions are likely to have a material (albeit difficult to quantify) impact on the demand for credit. Kiwibank has less exposure to high LVR loans than most of its major competitors with 16% of loans having LVRs in excess of 80%, compared to more than 20% for Westpac, ASB and ANZ. Kiwibank has publicly stated that it will prioritise its above 80% LVR lending to first home buyers post 1 October Net Interest Margin Kiwibank s NIM has improved in recent years and is now similar to pre GFC levels. Margins fell from late 2006, because of the lag in timing to re-price fixed rate mortgages issued before the crisis to reflect 1 Source: New Zealand Bankers Association 2 Source: RBNZ Financial Stability Report May Reliance Restricted

11 Company performance Company performance Company performance Industry Net Interest Margin Source: Reserve Bank of New Zealand 3 increases in the funding costs faced by banks from the banking crises that began around the time of the collapse of Bear Stearns in March In recent times NIM has stabilised. However, with increased competition among banks, particularly for fixed rate loans, NIMs may be under pressure in future periods. Non performing loans by sectors 2 Source Reserve Bank Financial Stability Report May 2013: 5 4 % 2 3 % Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 0 Housing Rural Commercial Property SME Corporate Total Impairments & Provisioning % Jun-12 Jun-13 Impairment: Kiwibank 0.7% 0.4% ASB 0.5% 0.5% BNZ 0.9% 0.7% Westpac 1.6% 1.0% ANZ 1.7% 1.1% Provisioning: Kiwibank 0.7% 0.6% ASB 0.4% 0.4% BNZ 0.9% 0.7% Westpac 1.1% 0.9% ANZ 1.3% 1.0% Source: 2013 Kiwibank investor relations presentation Bad Debt Provisions/Impairments Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Bad debt provisions and impairment of loans have been major drivers of decreased earnings of banks in recent years. Kiwibank had impairment losses of NZ$7m in FY13 which compares with NZ$79m in FY11 and NZ$35m in FY12. The chart below shows non performing loans have generally been declining across all sectors in the economy. Impairments and provisioning have declined marginally for the major banks in FY13 as a percentage of total gross loans and advances. Kiwibank has made lower provisioning relative to the majority of its peers in FY Reliance Restricted

12 Company performance Company performance Company performance Domestic letters volume growth Source: Company data 0.0% -1.0% -2.0% -3.0% % Growth -4.0% -5.0% -6.0% Postal Services NZ Post has provided physical mail delivery services in New Zealand for over 170 years, initially as a government department and, from 1987, as a State Owned Enterprise. A 1998 Deed of Understanding between the company and the government dictates the frequency and required delivery points for varying proportions of New Zealand s population. Primarily due to a shift to digital delivery of communications previously physically delivered, NZ Post has suffered a significant reduction in postal volumes, as evidenced by: A reduction in mail volumes from 1.1b items in 2002 to 0.8b items in the 2012 financial year. A decrease of 7.5% between FY12 and FY13. NZ Post forecasts a further decline of approximately 5% per annum, to around 600m items by 2016/17 3. In response to these changes NZ Post has proposed changes to the Deed of Understanding to enable essential mail services to be provided economically. A summary of the proposed changes is provided below. -7.0% -8.0% FY07 FY08 FY09 FY10 FY11 FY12 FY13 Proposed changes to the Deed of Understanding Currency: NZ$m Current Deed NZ Post Proposal Delivery frequencies 6 days per week - 95% of addresses 5 days per week % of addresses 1-4 days per week - remaining 0.12% of addresses Total minimum delivery addresses At least 1,463,938 At least 1,910,010 Minimum 3 days per week % of addresses 1 day per week - remaining 0.12% of addresses Existing addresses with 2-3 day frequency - unchanged Commitment to new addresses None Will add on request unless operationally impracticable or would jeopardise the commercial sustainability of the universal postal service Limit on use of community boxes No more than 1.5% of total delivery points No more than 3.0% of total delivery points Postal outlets At least 880 At least 880, including self-service kiosks Postal outlets with agency services At least 240 At least 240 providing bill payment services, including self-service kiosks Charging Rural delivery fee not to be re-introduced no change Access to postal network Obligation to provide competitors access to the NZ Postal no change network Source: Ministry of Business, Innovation & Employment: Postal Services 3 Source: Proposal by New Zealand Post to the Minster fro Communications and Technology. Review of the Deed of Understanding between New Zealand Post Limited and the Government of New Zealand dated 17 February 1998 (Published in January 2013) 12 Reliance Restricted

13 Company performance Company performance Company performance Postal services historical income statement Currency: NZ$m FY10A FY11A FY12A FY13A Revenue Cost of sales (518) (507) (501) (544) Gross profit Other operating expenses (189) (185) (188) (194) Adjusted EBITDA Depreciation & (32) (31) (34) (32) amortisation Adjusted EBIT (2) 1 (22) (29) Net finance expense (12) (8) (10) (7) Adjusted PBT (14) (7) (32) (36) Income tax (12) Adjusted Net profit (26) (0) (21) 4 Adjustments (Nonrecurring) 1 (41) Report Net profit (25) (41) (4) 14 Source: S&P Capital IQ, EY analysis Domestic letters price growth Source: Company data NZ $ The Ministry of Business, Innovation & Employment sought public submissions on the proposed amendments in March 2013, and we understand a formal response from the Government is imminent. We have derived the summary historical income statement shown to the left using the NZ Post parent company figures from the statutory accounts. We understand these figures include corporate overheads that relate to other operating segments, but do not have the information required to apportion these costs. We make the following comments in relation to the table: Earnings have been adjusted for the following one-off costs: Restructuring costs Impairment Gain on sale of assets The average price of domestic letters has increased substantially in the last 10 years increasing from 40 cents per letter to 70 cent with prices rising approximately every 3 years. This has somewhat offset the impact on revenue of the decline in volume and has contributed to revenue being largely flat between FY10 and FY13. Although letter volumes have declined parcel volumes have increased, particularly international parcel volumes. This has partially offset some of the lost revenue from letters but not materially, given relatively low parcel volumes. Gross profit margin declined markedly in FY13 compared to prior years, driven by a significant increase in the cost of sales which more than offset improved revenue from the increase in letter prices. There has been a year on year deterioration at all levels of earnings between FY10 and FY13 highlighting the impact the decrease in volume has had on profitability Mar-04 Apr-04 Jun-07 Oct-10 Jul-12 Domestic standard letter price 13 Reliance Restricted

14 Company performance Company performance Company performance ECL historical income statement Currency: NZ$m FY10A FY11A FY12A FY13A Revenue Cost of sales (203) (206) (215) (216) Gross profit Total expenses (55) (54) (56) (57) EBITDA Depreciation & amortisation (6) (5) (6) (5) EBIT Net finance expense (3) (2) (2) (3) Profit before income tax Income tax (7) (7) (7) (7) Net profit (Adjusted) Loss on disposal of (14) investment Reported Net Profit Revenue growth n/a 0.0% 4.4% 1.3% Volume growth n/a 1.8% 0.0% 5.9% Net profit growth (adjusted) n/a (3.7%) 12.7% 7.4% EBITDA Margin 10.9% 10.1% 10.3% 11.0% Revenue/Parcel 8.9% 8.8% 9.1% 8.7% Source: FY11 & FY13 ECL Financial Statements ECL Parcel Volumes Source: NZ Post FY13 annual results presentation Numbers of parcels (Millions) Express Courier Limited (ECL) ECL is 100% owned by NZ Post. Previously the business was a 50/50 joint venture with DHL. NZ Post acquired the 50% DHL stake in June The company provides courier and logistics services for the New Zealand market under the CourierPost, Pace and Contract Logistics brands: CourierPost is NZ Post s standard courier service providing courier service to over 1.85m delivery points throughout New Zealand and international services through DHL s global operations. Pace provides a range of urgent courier delivery services including across town, document messenger, intercity and nationwide. Contract Logistics offers goods and service logistical solutions to a range of customers in various industries in New Zealand, including outsourcing of distribution and warehouse functions, inventory management, packaging and various other logistics services. The services offered by Contract Logistics are tailored to the needs of individual businesses to maximise value-added benefits. ECL s main competitor is Freightways. It is estimated that both companies have a similar share of the courier market at approximately 40% each. The remaining 20% is made up of small competitors including Fastways, Peter Baker Transport and Toll. Pricing plays an important role in driving market share. ECL has reported low growth in recent financial years across volume, revenue and earnings. Its EBITDA margin has been maintained over this period improving to 11% in FY13 compared to around 10% in the two previous years. The improvement appears to reflect both an increase in revenues and an improvement in the gross profit margin (which could be a consequence of changes in mix, price effects etc.). The chart to the left shows historical volumes. It shows minimal volume growth between FY09 and FY12, with FY13 showing the first improvement for 5 years where volume increased by 5.9%. At the same time, average revenue per parcel fell from NZ$9.10 to NZ$8.70 in FY13, partially offsetting the impact of volume increases. ECL also reported a loss on disposal of investment in FY13. This related to the disposal of Roadstar which was operating at breakeven. The loss on disposal was NZ$13.7m which resulted in a reported net profit of NZ$4.5m. NPAT excluding this one-off item was NZ$18.2m 5 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 ECL Parcels 14 Reliance Restricted

15 Company performance Company performance Company performance NZ Post Group balance sheet Currency: NZ$m Jun10A Jun11A Jun12A Jun13A Cash and cash equivalents Trade and other receivables Inventories Other Total current assets Property, plant and equipment Intangible assets Other Total non-current assets Total specific banking assets 12,141 13,753 14,575 15,024 Total assets 13,075 14,682 15,851 16,140 Trade and other payables Borrowings Other Total current liabilities Borrowings - Non Bank Kiwibank Subordinated Debt Other Total non-current liabilities Total specific banking 11,457 13,075 13,861 14,048 liabilities Total liabilities 12,243 13,888 14,892 15,050 Shareholder s Funds Kiwibank Preference Shares Total equity and liabilities 13,075 14,682 15,851 16,140 Source: NZ Post Accounts Group Balance sheet The table on the left shows the historical balance sheet for NZ Post Group for the last four years. Specific banking assets represented NZ$15bn of the NZ$16bn of assets in FY13 Specific banking assets and liabilities have grown consistently over the four year period reflecting Kiwibank s increased market share. Earnings have been retained by the business to assist with funding the growth in Kiwibank. The balance sheet for the remainder of the business has been relatively static. Intangible assets increased significantly in FY12 largely reflecting goodwill from the purchase of DHL s 50% holding of ECL and Couriers Please and goodwill from the acquisitions of NZ Home Loans and Gareth Morgan Investments Ltd (now re-branded as Kiwi Wealth Management). Borrowings increased in FY12 from approximately NZ$500m to NZ$600m. While total borrowings remained at approximately NZ$600m in FY13, the mix of debt instruments used changed. NZ Post used the sales proceeds from its Datacom divestment to repay NZ$150m of commercial paper and bank loans, while Kiwibank raised NZ$150m of Basel III compliant subordinated debt. 15 Reliance Restricted

16 1. 16 Reliance Restricted

17 Information Sources In generating the earnings model we have had regard to: Historical statutory financial information (NZ Post Ltd, Kiwibank, ECL) NZ Post s 2013 Statement of Corporate Intent NZIER Quarterly Predictions September 2013 IHS Global Insights Discussions with NZ Post management Cost of Capital Estimate Estimates of the unlevered free cash flows of postal services and ECL are discounted using a weighted average cost of capital (WACC). For Kiwibank we discount free cash flows to equity using a cost of equity based on a set of comparable companies. We have adopted the simplified Brennan-Lally approach to calculate the cost of equity. For each of the companies we have used the following assumptions: The risk-free interest rate of 4.1%, based on the 10-year New Zealand government bond rate as at 30 June The current corporate tax rate in New Zealand of 28%. A post-tax market risk premium of 7.5%. For the non-banking business, we have assumed a credit rating of BBB as rated by Standard and Poors at May 2013, implying a debt margin of 2.7% (although we note that the postal business would likely not be in a position at present to gain a BBB rating on a standalone basis). We have estimated asset betas using a sample of broadly comparable companies. We have also used the median gearing from the same sample to estimate the weighting of debt and equity for the purposes of estimating the appropriate opportunity cost of capital for each of the segments. 17 Reliance Restricted

18 The tables below outline the cost of capital estimates for each business. Kiwibank Cost of Equity Weighted average cost of capital Cost of equity (CAPM) Risk free rate of return (10 yr Govt. Bond 30/6/13) Rf Cost of equity 4.1% Post tax risk free rate Rf * (1 - Tc) 3.0% Equity market risk premium PTMRP (Rm - Rf) 7.5% Beta estimate βe 1.1 CAPM based cost of equity Re 11.3% Cost of equity 11.3% Source: S&P Capital IQ, RBNZ, EY analysis NZ Post (Postal) and ECL (Courier) WACC Weighted average cost of capital NZ Post (Postal) ECL (Courier) Cost of equity (CAPM) Risk free rate of return Rf 4.1% 4.1% Post tax risk free rate Rf * (1 - Tc) 3.0% 3.0% Equity market risk premium PTMRP (Rm - Rf) 7.5% 7.5% Asset beta βa Geared beta estimate βe CAPM based cost of equity Re 8.2% 11.6% Cost of equity 8.2% 11.6% Cost of debt Company credit spread 2.7% 2.7% Cost of debt Rd 6.8% 6.8% Capital structure Debt / Value D/V 2.7% 13.5% Equity / Value E/V 97.3% 86.5% WACC Local corporate tax rate Tc 28.0% 28.0% Weighted average post-tax cost of equity E/V * Re 8.0% 10.1% Weighted average post-tax cost of debt D/V * Rd * (1 - Tc) 0.1% 0.7% WACC (post-tax, nominal) 8.1% 10.7% Source: S&P Capital IQ, RBNZ, EY analysis The operations classified as investments are valued using a capitalisation of earnings approach. 18 Reliance Restricted

19 Kiwibank Net Interest Margin v Industry Source: Kiwibank Annual Reports and Reserve Bank of New Zealand % FY09 FY10 FY11 FY12 FY13 Kiwibank NIM Industry Avg. NIM Kiwibank Forecast Assumptions Adopted % FY12A FY13A FY14F FY15F FY16F Credit market growth % 1.3% 3.5% 3.2% 3.7% 4.4% Market share % 9.5% 10.3% 10.7% 11.1% 11.5% Net Interest Margin % 1.8% 1.8% 1.8% 1.8% 1.8% Average fee revenue % 0.8% 0.8% 0.8% 0.8% 0.8% Average payment services fee income 0.5% 0.5% 0.5% 0.5% 0.5% Operating costs to income % 65.2% 68.2% 67.2% 66.2% 65.2% Impairment % (Average loans and advances) 0.3% 0.1% 0.2% 0.2% 0.2% Tier 1 capital ratio 10.4% 10.5% 10.5% 10.5% Required Tier 1 capital ratio 8.5% 8.5% 8.5% 8.5% Source: Kiwibank Annual Report, EY analysis Kiwibank Estimated Market Share Source: Kiwibank Investor relations 2012 % Retail market share FY11A FY12A FY13A FY14F FY15F FY16F Credit is forecast to increase at the same rate as nominal GDP beyond FY15. This assumption reflects a continuation of growth at similar levels to in FY13, but well below the 10% plus credit growth observed in the early 2000s. The impact on credit growth of the new RBNZ LVR restrictions is uncertain, but they are likely to dampen credit growth in the immediate future, particularly since approximately 30% of new retail lending was at LVRs in excess of 80% in the last 12 months. We have therefore assumed credit grows at 1 percentage point less than nominal GDP in FY14 and FY15. Market share is projected to continue to grow but at a slower rate of 0.4 percentage points per year. This reflects an assumption that as Kiwibank increases in size, it will find it more difficult to increase its market share especially with the high degree of competition from the large Australian banks in the New Zealand market. We assume Kiwibank s market share will reach 14.3% by FY23 and then remain stable. In FY13 the net interest margin for the industry returned to levels similar to those observed prior to the GFC. Due to the high level of price competition in the banking market we assume the average industry NIM will not increase above current levels. Kiwibank s NIM will contract slightly over the forecast period due to its market position and the make-up of its loan portfolio, and remain below the industry average. Kiwibank s current cost to income ratio is approximately 68.2%. We assume Kiwibank improves its cost to income ratio by approximately 1 percentage point per annum from FY14 onwards until it stabilises at the bank's target ratio of 60%. We assume this improvement will result from a combination of scale economies as the bank grows bank and a reduction in costs relating to the Basel III and anti money laundering regulatory requirements which were the primary drivers of the increase in the cost to income ratio from 65% in FY12 to 19 Reliance Restricted

20 Kiwibank Earnings Estimate Currency: NZ$m FY12A FY13A FY14F FY15F FY16F Net interest income Other income Total operating income Operating expenses (248) (280) (295) (309) (326) Impairment (35) (7) (24) (26) (28) Operating earnings Depreciation & Amortisation (25) (24) (21) (23) (25) Net profit before taxation Income tax benefit / (32) (38) (37) (40) (45) (expense) NPAT Loans and advances 12,445 13,202 14,147 15,215 16,460 Operating income growth % 18.7% 6.4% 5.5% 6.7% 7.2% NPAT growth % 270.9% 22.8% (3.1%) 10.4% 10.7% Source: Kiwibank Annual Report, EY analysis 68% in FY13. Our assumed long run ratio of 60% is still materially higher than the current cost to income ratios of both the Big 4 Australian banks and analysts' forecasts for Heartland. Impairments are assumed to be 0.17% for the forecast period, equivalent to the average net impairment charge from FY06-FY13, a period which captures both the recessionary years of 2008 and 2009 and its aftermath, and a period of more normal economic conditions. We assume Kiwibank maintains a tier 1 capital ratio in line with FY13 levels of approximately 10.5%. This is 2% above the required ratio for Basel III compliance from January We also assume Kiwibank receives NZ$50m in equity in each of FY14 and FY15 from NZ Post. These funds substitute for the preference shares which are not tier 1 compliant under Basel III. Kiwibank Earnings Estimate Net interest income grows in line with growth in the credit market and improvements in market share. Fee income also grows improves as the size of the loan book increases. In FY14 we forecast a small decline in NPAT which is driven by assumed impairments rising from NZ$7m in FY13 to NZ$24m. Impairment (% of loans & advances) Source: Kiwibank Financials, EY analysis 0.80% NPAT grows at approximately 11% in FY15 and FY16 reflecting the growth in lending and also the reduction in the cost to income ratio. 0.70% 0.60% % Loans & Advances 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% FY10A FY11A FY12A FY13A FY14F FY15F FY16F 20 Reliance Restricted

21 Valuation summary Currency: NZ$m FY14F FY15F FY16F TV Corporate tax rate 28.0% Terminal growth rate 3.5% NPAT Plus: Depreciation and amortisation Less: Net capital expenditure (28) (30) (33) (34) Increase in Loans/Advances (945) (1,068) (1,245) (953) Increase in Deposits/Borrowings 849 1,023 1, Free cash flow to equity (9) Valuation summary FCFE - Year FCFE - Year FCFE - Terminal value 803 Kiwibank total equity value 1,152 Preference share (160) Kiwibank ordinary equity value 992 Source: EY analysis Valuation cross-check Currency: NZ$m Market cap Price/Book P/E multiple Commonwealth Bank of Australia 131, Westpac Banking Corporation 105, ANZ Banking Group Limited 91, National Australia Bank Limited 80, Bendigo and Adelaide Bank Limited 4, Bank of Queen sland Ltd. 3, Heartland New Zealand Limited Wide Bay Australia Ltd Average (Large) Average (Small) Kiwibank Source: S&P Capital IQ, EY analysis Free cash flow to Equity valuation We value Kiwibank by discounting forecast free cash flows to equity. We assume a proportion of retained earnings must be held as equity to fund future growth in the loan book while retaining Basel III compliance, and that the balance of net profit is distributed as dividends. We assume a terminal growth rate of 3.5% which is based on the IHS Insight s long-run forecast rate of nominal GDP growth, under the assumption that long term credit will increase in line with nominal GDP. We assume a cost of equity of 11.3%. Based on the assumptions discussed above we derive a midpoint equity value for Kiwibank of NZ$1,152m. This implies a midpoint ordinary equity value of NZ$992m (after the deduction of NZ$160m as the market value of the preference shares). Valuation Cross checks We calculate the implied forward price to book ratio and implied P/E multiple for Kiwibank and compare these to comparable companies from Australia and New Zealand. On sorting the comparable companies by market capitalisation we observe a correlation between both price/book and P/E ratio and size, with the larger banks exhibiting higher multiples. The price/book ratio of the 4 largest banks is 1.9x which is approximately double the small bank average of 0.9x. We consider Kiwibank to be more comparable to the smaller banks and as shown in the table Kiwibank s price to book ratio is 1.2x. The implied P/E ratio for Kiwibank of 12.3x is similar to the average of the larger banks. This is likely driven by the projected future growth in market share and also the projected reduction in the cost ot income ratio. 21 Reliance Restricted

22 Estimated Parcels and Letter Volumes Source: Company data, EY analysis Letter (Millions) FY13A FY14F FY15F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F Letter Volumes Parcel Volumes Parcels (millions) Postal Services The table and chart below summarises the key assumptions made during the forecast period. Forecast Assumptions Adopted % Units FY12A FY13A FY14F FY15F FY16F FY17F Letters Volume Growth % (6.9%) (7.9%) (5.0%) (5.0%) (5.0%) (5.0%) Price Growth - Domestic Letters % - % 16.7% 0.0% 0.0% 0.0% 14.3% Price Growth - Bulk Letters % 2.3% 2.7% 2.6% 2.8% Parcels Volume Growth % 11.4% 1.4% 2.8% 3.0% 2.9% 2.7% Price Growth % 2.3% 2.7% 2.6% 2.8% Other Employee Numbers % (4.1%) (2.4%) (6.7%) (7.3%) Annual Capex (NZ$m) NZ$m Source: Company data, EY analysis We have assumed NZ Post s proposed new Deed of Understanding replaces the existing deed from 1 July The major impact of the proposed Deed of Understanding is that frequency of mail delivery will decline from 6 days a week to 3 days a week. Our forecast assumes letter volumes decline at 5% per year, below the 7-8% decline observed in the last two years. Our assumed rate of decline reflects the mid-point of the range for the annual average rate of decline of 4% to 6% between 2004 and The rate is also consistent with previously reported industry research on the expected rate of decline for physical mail internationally, and with the rate assumed for the UK in the Royal Mail prospectus. By 2023 we forecast that volumes will have declined to 450m letters per year. This compares with 1.1bn letters per year sent in The price of domestic letters is assumed to increase every 4 years by 10 cents which is similar to but slightly above forecast inflation, and implies an increase in the cost of sending a domestic letter in FY17 from 70 cents to 80 cents. Bulk letter prices are assumed to grow annually at projected inflation rates. We assume parcel volumes grow at 2.5% per year roughly in line with real GDP growth. We assume the average annual price increases in line with inflation. We have assumed capex will be equal to the company s projections as published in the latest Statement of Corporate Intent. A large portion of the capex relates to strategic transformation programmes which we 22 Reliance Restricted

23 Postal Services Earnings Estimate Currency: NZ$m FY12A FY13A FY14F FY15F FY16F FY17F Revenue Cost of Sales (501) (544) (533) (534) (519) (515) Gross Profit Expenses (188) (194) (187) (192) (196) (201) Adjusted EBITDA Depreciation and (34) (32) (37) (42) (49) (51) Amortisation Adjusted EBIT (22) (29) (21) (33) (31) 5 Revenue Growth 5.7% -0.8% -0.2% -0.1% 5.3% Gross Profit Margin 28.5% 26.6% 27.6% 27.3% 29.2% 33.3% EBITDA Margin 1.8% 0.4% 2.2% 1.2% 2.4% 7.2% Source: NZ Post Annual Accounts, EY analysis Revenue and Margins Source: EY analysis assume will result in the restructure of the postal services division. This will provide the business with a greater degree of control over its costs as volumes decline. We note the inherent uncertainty in the magnitude of the impact the new Deed of Understanding and any restructuring will have on the cost structure of NZ Post. Equally important will be NZ Post's as yet uncertain ability to execute the initiatives required to achieve the projected cost savings. Postal Services Earnings Estimate The continued decline in letter volumes results in a reduction in revenue between FY13 and FY16. The assumed price increase in FY17 results in a NZ$40m increase in revenue, similar to the improvement observed in FY13 after the most recent price increase. Under the reduced service requirements the cost of sales declines, resulting in an improvement in gross margin. Comparable operations globally have operated at average EBITDA margins between 3% and 17% over a period of five years. We have assumed that, following the restructure, EBITDA margins for NZ Post will improve from 1% in FY15 to approximately 7% in FY17 (the margin improvement is also driven by the domestic letter price increase in FY17) and then stabilise at 8% at the end of the forecast period % 30.0% EBIT remains negative up to FY16 and is only marginally positive in FY17 even after the price increases and full impact from the new deed of understanding forecast in that year. This is partly attributable to the significant increase in depreciation due to the high levels of capex incurred in FY14-FY16. NZ$m % 20.0% 15.0% % We have estimated the respective contributions to revenue from parcels and letters in FY13 and have projected this forward. Although parcel volumes are currently low relative to letters, the combination of increasing parcel volumes, decreasing letter volumes and much higher average unit prices for parcels result in parcels making up a material share of revenue by FY % % 500 FY12A FY13A FY14F FY15F FY16F FY17F 0.0% Revenue Gross Margin EBITDA Margin 23 Reliance Restricted

24 Postal Services FCF estimate and DCF Enterprise Value Currency: NZ$m FY14F FY15F FY16F TV Corporate tax rate 28.0% Terminal growth rate 1.0% EBIT (21) (33) (31) 25 Less: Unleveraged tax (7) Plus: Depreciation and amortisation Less: Net capital expenditure (60) (79) (59) (27) Less: Increase in WC (42) 2 (3) 1 Free cash flow (80) (60) (35) 25 Valuation Summary DCF - Year 1-3 (158) DCF - Year DCF - Terminal value 169 Total EV (Postal Services) 117 Source: EY analysis Valuation Crosschecks Currency: NZ$m Country Market cap EBITDA multiple EBIT multiple Pos Malaysia Berhad Malaysia 1, Singapore Post Limited Singapore 2, Oesterreichische Post AG Austria 3, Deutsche Post AG Germany 38, Median Average NZ Post (Postal Services) 7.3 n/a Source: S&P Capital IQ Discounted Cash Flow Valuation Capex is assumed to reduce to maintenance levels beyond FY16. Our forecast working capital is based on average turnover days in FY12 and FY13 Based on the assumptions discussed above and a terminal growth assumption of 1% (the net impact of declining letter revenue and increasing parcel revenue) we derive a midpoint enterprise value for postal services of NZ$117m. The valuation summary shows that net cash flows in years 1-3 contribute -NZ$158m to total value, reflecting the large restructuring-related capex spend. This results in value of NZ$106m in years 4-10 and a further NZ$169m in the terminal period. The mid-point estimate of value is very sensitive to the valuation parameters. Small changes in the key parameters (e.g. rate of decline in volumes), result in material changes to the result. We therefore believe that, in this particular case, it is more appropriate to look at the range (-NZ$80m to NZ$314m) rather than at the point estimate of value. Valuation Cross checks We have calculated the implied forward EV/EBITDA and forward EV/EBIT multiples for postal services and compare these to multiples for four listed postal companies, though we note that the comparability of these businesses to NZ Post is somewhat limited. The current performance of NZ Post s postal segment also limits the usefulness of these crosschecks. Based on FY14 earnings postal services our valuation implies an EV/EBITDA multiple of 7.3x, compared to an average of 7.5x for our comparable companies. 24 Reliance Restricted

25 ECL Earnings Estimate Currency: NZ$m FY12A FY13A FY14F FY15F FY16F Revenue Cost of Sales (215) (216) (226) (236) (247) Gross Profit Expenses (56) (57) (59) (61) (64) EBITDA Depreciation and Amortisation (6) (5) (5) (6) (6) EBIT Source: ECL Annual Accounts, EY analysis Express Courier Limited Forecast Assumptions Adopted Drivers Units FY14F FY15F FY16F Market Share Growth % - % - % - % GDP Growth % (Volume) % 1.8% 2.0% 1.9% CPI % (Price) % 2.3% 2.7% 2.6% EBITDA Margin % 10.9% 10.9% 10.9% Annual Capex ($m) $m Source: ECL Annual Accounts, EY analysis Revenue and EBITDA Margin Source: EY analysis Revenue FY12A FY13A FY14F FY15F FY16F Revenue EBITDA Margin 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% EBITDA Margin We forecast ECL volumes will continue to grow in line with projected GDP growth Given the high degree of price competition in the industry we assume prices cannot be increased faster than inflation. We also assume market share remains constant over the forecast period given the current level of competition and the stability of relative market shares In recent years ECL has shown its ability to maintain EBITDA margins even in years with lower levels of growth. In FY13 ECL s EBITDA margin increased from 10.3% to 11.0% after exiting the Roadstar business. On this basis we assume EBITDA margins are maintained in the forecast period at near FY13 levels. Capex has been minimal in recent historical years. We assume this increases in the near term to return the investment in fixed assets to historical levels. Despite the assumed increase to NZ$9m in FY14 and NZ$6m in FY15, ECL exhibits a relative low capex requirement relative to its size. ECL Earnings Estimate With prices increasing with inflation and volume growth as described above, we assume ECL will continue to generate moderate revenue growth as it has done during the most recent historical years. As the EBITDA margin is assumed to be maintained the growth in revenue results in growth at both EBITDA and EBIT levels. 25 Reliance Restricted

26 ECL FCF estimate and DCF Enterprise Value Currency: NZ$m FY14F FY15F FY16F TV Corporate tax rate 28.0% Terminal growth rate 2.0% EBIT Less: Unleveraged tax (8) (9) (9) (12) Plus: Depreciation and amortisation Less: Net capital expenditure (9) (6) (6) (8) Less: Increase in WC Free cash flow Enterprise value DCF - Year DCF - Year DCF - Terminal value 140 Total EV (ECL) 295 Source: EY analysis Discounted Cash Flow Valuation Based on the assumptions discussed above and assuming a terminal growth rate of 2% we derive a midpoint entity value for ECL of NZ$295m. Valuation Cross checks We calculate the implied forward EV/EBITDA and forward EV/EBIT multiples for ECL and compare to comparable listed courier companies from around the world. Our sample includes 2 companies from New Zealand, Mainfreight and Freightways, and Toll Holdings Ltd from Australia. The EV/EBITDA multiple of the comparable companies in the table on the left shows a wide range. The EV/EBIT multiple lies within a tighter range and because of this we consider the EV/EBIT multiple is a better crosscheck. ECL s EV/EBIT multiple is 10.0x based on FY14 earnings. This compares to the comparable company average of 11.3x and median of 11.1x. We note that ECL is smaller than all of the comparable companies and would therefore (other things equal) normally be valued at a lower multiple. ECL s local competitors Mainfreight and Freightways have EV/EBIT ratios of 11.7x and 11.1x respectively. Although larger than ECL these companies are the smallest in the sample. Valuation Crosschecks Currency: $ millions Country Market cap EBITDA multiple EBIT multiple TNT Express N.V. NTE 3, FedEx Corporation USA 36, Con-way Inc. USA 2, Freightways Limited NZ Mainfreight Limited NZ 1, Kuehne + Nagel International AG Sweden 14, Toll Holdings Limited Australia 4, Median Average Express Couriers Limited Source: S&P Capital IQ, EY analysis 26 Reliance Restricted

27 Investments EV/EBITDA Multiples Currency: NZ$m Converga Courier Please Comparable Company Multiples Median Average Midpoint Multiple % Discount (2.9) (2.2) Total EBITDA Multiple for Valuation Estimated Future maintainable EBITDA Midpoint Enterprise Value Source: S&P Capital IQ, EY analysis Investments For the purposes of this valuation, we have grouped the remaining operations of NZ Post Group. These operations include: Converga Group Limited and subsidiaries, a business solutions company (100% owned) Couriers Please Holdings Pty Limited, a courier company based in Australia (100% owned) Localist Limited, print, digital and mobile directional media services (100% owned) Reach Media New Zealand Ltd, unaddressed mail company (50% owned) Due to limited financial information on these companies we have adopted an earnings capitalisation approach to estimate their values. Based on information provided, we understand that Localist and Reach Media generate breakeven to marginally positive earnings and their operations are relatively immaterial to the group, so we have adopted a conservative approach and not assigned any value to these operations. We have assessed a value for Converga and Couriers Please. We have sourced the following financial statements for these two businesses. FY12 Couriers Please Holdings Pty Limited FY11 Converga Pty Limited We have also relied on guidance from NZ Post to estimate future maintainable earnings. Valuation We apply an appropriate EV/EBITDA multiple using a sample of listed comparable companies (business solutions companies for Converga and courier companies for Couriers Please) to the EBITDA estimates to arrive at an enterprise value for each business. The average and median EBITDA multiples are shown in the table to the left along with the estimated historical EBITDA. We have applied a 30% discount to the comparable companies EBITDA multiples to account for the significantly smaller size of these companies. We derive a midpoint value of NZ$140m for investments consisting of NZ$94m for Converga and NZ$46m for the Couriers Please business. 27 Reliance Restricted