Singapore Post Ltd (SPOST SP) - US e-commerce and mail underperformed; HOLD
TP, EPS cut on weak 3Q17; impairment risk looming
- 3Q17 core earnings missed by c.10% and fell 29% YoY. 9M17 met 68% of our FY17E. The risk of a major impairment has become more likely due to the poor performance of Trade Global.
- Maintain HOLD and cut our DCF-based TP 24% to SGD1.34 (WACC 7.6%; LTG 1%) after reducing our FY17-19E EPS by 14-22%.
- Two negative surprises came from this peak earnings quarter:
- Trade Global, a newly acquired US e-commerce business fell into a deeper loss due to structural issues of key customers and cost pressures; and
- A deteriorating postal segment due to lower domestic letter volumes and slower growth in international mail.
Structural headwind for US e-commerce business
- Trade Global’s performance was impacted by structural issues at two key customers amid the peak period – one filed for bankruptcy and the other decided to in-source its e-commerce freight operations. However, Jagged peak performed well.
- The US e-commerce division incurred a loss of SGD10.2m in 3Q17, which was higher than the loss of SGD6.2m in 6M17.
- To recap, SingPost acquired Trade Global and Jagged Peak in Nov 2015 and Mar 2016 for SGD236m and SGD23m, respectively to expand into US.
Largest business, mail segment continues to weaken
- The mail segment, SingPost’s largest business, continues to deteriorate. It reported a 6.6% YoY decline in operating profit on the back of 2.9% YoY growth in revenue for 3Q17.
- Domestic mail’s decline is expected to continue due to a wider push for e-statements. Furthermore, the revenue growth for international mail has decelerated to 11% YoY, from the 20-30% range in the past four quarters.
- The trans-shipment program for Alibaba started in Oct 2015 and it will be more difficult to repeat similar growth on a higher base.
Risk of major impairment from Trade Global
- Given the major underperformance of newly acquired Trade Global, the Board of SingPost flagged the risk of a significant asset impairment.
- We note that the write-off of Trade Global’s entire SGD169m goodwill could wipe out SingPost’s FY17E earnings. Nonetheless, the dividend should remain intact as an impairment is a non-cash and non-core item.
- Faster than expected turnaround of TradeGlobal, a newly acquired e-commerce enabler for fashion and lifestyle.
- Higher than expected revenue growth in e-commerce logistics, from more customers and services.
- Higher than expected margins for e-commerce logistics, from economies of scale and operating leverage.
- Inability to resolve corporate-governance conundrum, including board’s independence and disclosures.
- Failure to extract synergies and integrate its largest acquisition, TradeGlobal.
- Worse-than-expected deterioration in mail business before e-commerce logistics compensates.