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.
- 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