Singapore Post Ltd (SPOST SP) - Maybank Kim Eng 2017-02-13: US e-commerce and mail underperformed; HOLD

SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd (SPOST SP) - US e-commerce and mail underperformed; HOLD

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:
1. 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
2. A deteriorating postal segment due to lower domestic letter volumes and slower growth in international mail.

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.

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.

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.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-13

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.34 Down 1.750