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

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


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: 
    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.


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.


Swing Factors


Upside

  • 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.

Downside

  • 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





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