Singapore Post (SPOST SP) - UOB Kay Hian 2016-10-12: Shopping’s Over, Time For Delivery

SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - Shopping’s Over, Time For Delivery

With the acquisition period essentially over, SPOST’s strategy going forward will be focused on execution and driving integration.
We believe the strategy will be undertaken through a three-pronged approach, which involves defending the core postal business while integrating and creating synergies across its commercial network and at the same time unlocking value through SPC mall - a non-core asset.

Updates on postal segment and integration efforts. This report highlights updates on the company’s strategy for the postal segment, integration efforts by management as well as corporate activities.

One area of concern of investors was the prospects of the postal business in the face of digital disruptions. While domestic mail revenue has largely plateaued over the years, we understand that the postal segment remained wellsupported by growth in international mail revenue, largely driven by higher outbound volumes from Alibaba.
As an indication of scale, in its latest financials release, Alibaba’s international sales increased 123% yoy to Rmb1.1b in Apr-Jun 16, and it is expected to grow as Alibaba looks to increase overseas e-commerce revenue to 50%.
Meanwhile, we expect international mail volumes in 3QFY17 to be seasonally higher, as SPOST gears up for events along the likes of Singles’ Day, Cyber Monday and Black Friday.
We estimate international mail revenue to continue growing at a three-year CAGR of 11.4% in FY17-19.

With the period of asset buying essentially over, we understand that SPOST’s focus is now on integration and fine-tuning its universe across e-commerce, freight, warehousing and last mile to realise synergies.
While we estimate strong revenue growth in the e-commerce and logistics sectors (estimated three-year CAGR OF 14-15% in FY17-19F), we also acknowledge that it will take time before operating leverage and economies of scale kicks in.
In the meantime, we expect volumerelated expenses to remain high on the back of a changing business mix towards ecommerce logistics. For FY17, we estimate volume-related expenses to account for about 43% of group revenue.

We understand that SPOST has secured three anchor tenants – movie theatre operator Golden Village, supermarket franchise NTUC as well as food court chain operator Kopitiam.
Redevelopment of the Singapore Post Centre (SPC) remains on track and projected completion is in mid-17, where we estimate residual capex for SPC to be at about S$170m.
In line with SPOST’s e-commerce direction, the mall will offer an O2 shopping experience (ie convergence of online and offline) as shoppers get to choose to collect purchases at mall or have them delivered to POPstations or residences.

Following recent newsflow on implementations of corporate governance (CG) recommendations, with appointment of three new non-executive independent directors as well as the reconstitution of the executive committee as a Finance and Investment Committee, amongst others, SPOST has substantially implemented all the CG recommendations.
We believe SPOST has made visible progress in steering the company’s policies, processes and procedures back on track.
What investors can look forward to in the near-term, would be the appointment of the new CEO (likely by end-16), who we expect will possess strong operational and execution skills in relevant areas such as logistics or e-commerce, so as to drive the integration of SPOST’s acquisitions and deliver value from its transformation.

Management highlighted that a dividend policy review is underway to ensure sustainability as well as a link to underlying earnings. While SPOST maintained an absolute dividend in 1QFY17, we believe a payout based on underlying net profit policy would be beneficial to SPOST’s transformation and integration journey as it allows sustainability and business reinvestment for growth.
Assuming an earnings-linked dividend policy, our sensitivity analysis indicates that a payout of 50-90% would translate to an annual dividend of 3.5-6.3 S cents, implying a dividend yield of 2.3-4.1%.

Maintain BUY with an unchanged SOTP target price of S$1.77.
Our SOTP is derived based on DCF valuation methodology for mail (WACC: 6.5%, rf: 2.5%, g: 1%), 7x 2017F EV/EBITDA for the logistics business, 2.3x 2017F P/S multiple for the ecommerce business and to value the property, we assume a cap rate of 6.0%.
We believe SPOST’s current valuation remains attractive, as value of core traditional mail business and property accounted for about 93% of SPOST’s current value per share (based on yesterday’s closing price), which suggests that logistics and e-commerce ventures are undervalued.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-12

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.77 Same 1.770