Singapore Post (SPOST SP) - 9MFY17: Earnings Slump On Cost Pressure, Maintain HOLD
- SPOST’s 9MFY17 underlying net profit (net profit -23% yoy) underperformed our and market expectations.
- With operating margins declining on all fronts due to cost pressure and the poor performance of Tradeglobal, we are inclined to believe elevated transformation costs will continue to be a bugbear in the near term.
- We trim our FY17-19F net profit forecasts by up to 19% to factor in higher costs.
- Maintain HOLD with a revised SOTP target price of S$1.46. Entry price S$1.30.
9MFY17 results dragged by cost pressure.
- Singapore Post (SPOST) reported a 9MFY17 underlying net profit of S$94.2m (-22.6%yoy), which represented 65% of our FY17 estimate.
- Earnings were impacted by operating losses from the US e-commerce business, costs relating to the new regional e-commerce logistics hub and a fall in domestic mail volumes.
- Notably, costs were elevated on both labour expenses (+18.2% yoy) due to a higher headcount from new subsidiaries as well as volume-related expenses (+38.1% yoy) due to higher international mail terminal dues as well as higher cost of sales and cost of outsourced services relating to TradeGlobal and Jagged Peak.
Headline numbers lifted by e-commerce business.
- 9MFY17 revenue increased 22.8% yoy as we continued to see growth from all three key segments, postal, logistics as well as e-commerce. Notably, 9MFY17 e-commerce revenue grew 281.7% yoy due to the inclusion of the US e-commerce acquisitions.
- E-commerce-related revenue continued on its strong growth momentum in the third quarter and as of 9M17, it made up 50.3% of group revenue, up from 33.4% in the corresponding period last year.
Postal margin declined on change in revenue mix.
- 9MFY17 postal operating profit declined 5.4% to S$113.9m due to a decline contribution from the domestic mail segment and a shift in revenue mix to lower-margin international transhipment mail.
Logistics facing cost and pricing pressure.
- 9MFY17 operating profit (-22.7% yoy) remained under pressure from pricing pressure in the e-commerce logistics space as well as costs incurred from the new regional e-commerce logistics hub.
- The regional ecommerce logistics hub which was officially opened on 1 Nov 16, now records a utilisation of 18% (up from 10% as of our last November update). The ramp-up was slower than we expected and we will likely turn more positive when we see a faster scale up in volumes within the group’s network so that it can derive sufficient operating leverage from economies of scale.
E-commerce: Jagged Peak doing well; TradeGlobal behind business case.
- On the US acquisition front, while Jagged Peak showed good growth in volumes and revenue, recording positive earnings, TradeGlobal on the other hand incurred a significant loss instead of a profit in the third quarter peak season as initially projected by SPOST.
- TradeGlobal, which is expected to chalk losses for FY17, was impacted by cost pressures arising from tight competition in the Cincinnati area for seasonal fulfilment labour.
- Furthermore, performance was dragged by developments at two of its key customers, one of which decided to insource for e-commerce freight operations while another filed for bankruptcy, causing SPOST to reduce its business with them to mitigate risk.
Impairment on TradeGlobal highly likely in FY17.
- Echoing our previous guidance about a potential kitchen-sinking exercise to write-down goodwill that does not match up to the group’s growth assumptions, management has now disclosed that there is a risk of significant impairment to TradeGlobal’s carrying value.
- We understand that impairments will be assessed based on the results for the full financial year ending 31 Mar 17 and future business plans.
- Recall that SPOST’s goodwill nearly doubled to S$493.5m from FY15 to FY16, largely driven by the TradeGlobal acquisition completed in Dec 15 which had SPOST recording S$169.1m in goodwill.
- For 3QFY17, the group has declared an interim dividend of 0.5 S cents. The board has revised its dividend policy from an absolute amount to one that is based on a payout ratio ranging from 60-80% of underlying net profit for each financial year.
- In our estimates, we adopt a dividend payout estimate of 70%, which would mean an annual dividend of 3.8-5.5 S cents, based on FY17-19 EPS.
Adjust earnings estimates downwards by up to 19% for FY17-19.
- In our revision, we have modelled in higher cost assumptions, specifically, increased labour and administrative expenses to reflect higher cost assumptions for the new subsidiary at TradeGlobal, as well as higher volume-related expenses which we assume would be equivalent to 50% of group revenue for FY17-19 (previous expectation: 46-48%).
- Based on our new estimates, we project a 3-year CAGR of 4.9%.
Maintain HOLD with lower SOTP target price of S$1.46.
- In the near term, we believe earnings will continue to be hampered by a weaker performance at TradeGlobal as well as elevated transformation costs.
- Nevertheless, we remain positive on SPOST’s long term prospects, and will likely turn more positive when we see faster scale up in volumes in the group’s network so that it can derive sufficient operating leverage from economies of scale.
- Maintain HOLD with a lower SOTP target price of S$1.46 (pre S$1.76). Entry price: S$1.30.
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- Better-than-expected earnings from TradeGlobal.
- Higher-than-expected growth in the e-commerce and logistics businesses.