Singapore Post - DBS Research 2017-02-15: High growth potential is priced in

Singapore Post - DBS Vickers 2017-02-15: High growth potential is priced in SINGAPORE POST LIMITED S08.SI

Singapore Post - High growth potential is priced in

  • 3Q17 net profit dragged down by declines in mail profits and increased costs.
  • E-commerce logistics hub and SPC mall to drive improvements in FY18/19.
  • Not cheap at FY18F PE of 22x; HOLD with S$1.31 TP.



Trading at FY18F PE of 22x, above its global peers’ average of 16x. 

  • SPOST deserves a premium due to its higher earnings CAGR of 12% over FY17-20F versus 9% average at peers and its net-cash position versus peers’ average net debt-to-EBITDA of 1.5x peers. However, the stock needs to surprise on the upside to trade above 20x PE in our view.


E-commerce logistics hub and SPC mall are key drivers in FY18F/19F. 

  • SPOST’s e-commerce logistics hub started its operations in November 2016 with current capacity utilisation at ~18%. 
  • Rising utilisation will benefit the bottom line directly as higher depreciation & amortisation are already factored in. With investment phase mostly over, volume ramp-up will drive earnings growth. 
  • Besides, Singapore Post Centre (SPC) mall redevelopment will double the retail floor space, which is expected to be operational by mid-2017.


Earnings to bottom out in FY17F. 

  • Declines in high-margin domestic mail volumes, higher expenses due to recent investments in logistics hub, and loss of income from SPC mall development have tempered FY17 profitability. 
  • In addition, the management has decreased its dividend payments by 29-43% from previous levels (according to our projections). As a result, we believe the share is likely to remain range bound in the near term.


Valuation

  • We use discounted cash flows (WACC 6.2%, terminal growth rate 2%) to derive our TP of S$1.31. The stock offers a yield of c.3%. 
  • We recommend HOLD.


Key Risks to Our View: Further escalation of e-commerce losses

  • E-commerce segment is facing losses following the acquisitions made in Jagged Peak and Trade Global. A further escalation of losses in these businesses could depress SPOST's bottom line in the medium term




Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-02-15
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.31 Same 1.31





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