Singapore Post (SPOST SP) - UOB Kay Hian 2017-03-16: Transformational Phase Continues In FY18

Singapore Post (SPOST SP) - UOB Kay Hian 2017-03-16: Transformational Phase Continues In FY18 SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - Transformational Phase Continues In FY18

  • As FY17 draws to a close, we highlight the key events in FY18 which include a new CEO and the opening of the SPC mall
  • Watch out for the ramp-up at the e-commerce logistics hub and the performance drag at TradeGlobal (TG), which could form earnings headwinds for FY18. 
  • While we remain positive on SPOST’s long-term prospects, we think FY18 will remain a year of transformation, where elevated costs will continue to dampen earnings. 
  • Maintain HOLD and SOTP target price of S$1.46. Entry price: S$1.30.



WHAT’S NEW


Resignation of Marcelo Wesseler, CEO of SP Commerce. 

  • Singapore Post (SPOST) recently announced the resignation of Marcelo Wesseler as CEO of SP Commerce. We understand that Mr Wesseler will be assisting to ensure a smooth transition of duties during his period of notice until 5 Jun 17. 
  • Meanwhile, current President and CEO of Jagged Peak Paul Demirdjian has been appointed as interim CEO of the US business with immediate effect and will oversee the group’s businesses in the US.


STOCK IMPACT


Expect TG losses to continue in FY18... 

  • TradeGlobal (TG) incurred a significant loss instead of a profit in the third quarter as initially projected by SPOST, due largely to labour cost pressure as well as revenue losses of its two key customers, which we understand are in the list of the top ten customers for TG. 
  • We expect the revenue gap and cost pressure to continue into FY18.

…but losses to narrow on restructuring plans. 

  • We are cautiously optimistic that losses will likely taper off in FY18, on measures such as warehouse automation and new customer onboarding/fulfilment efforts to restructure TG. 
  • Furthermore, we note Paul Demirdjian, the newly-appointed interim CEO of the US business, is equipped with strong e-commerce experience. Prior to co-founding Jagged Peak in 2000, he held more than 25 years of leadership positions at several technology companies. To date, Jagged Peak has delivered growth in volumes and revenue, offering positive earnings contribution to SPOST.

New CEO to drive integration efforts. 

  • A key highlight for FY18 is the onboarding of new CEO Paul William Coutts on 1 Jun 17. Given his extensive experience across the logistics value chain in express delivery and forwarding at various major global logistics and postal companies, we are optimistic that he will be instrumental in driving the consolidation of SPOST’s e-commerce logistics business. 
  • Nevertheless, we reckon it may take time for a new CEO to settle into his role and results will only be tangible after 6-12 months.

A scalable model... 

  • Recall the regional e-commerce logistics hub recently opened on 1 Nov 16. Armed with parcel sorting capabilities and two warehousing floors with integrated end-to-end solutions, the hub has the capacity to process up to 100,000 parcels a day to serve a global delivery network of more than 200 countries. 
  • With automation as the key strength of the e-commerce logistics hub, we see the platform as highly scalable.

…which needs volume and time. 

  • As per our last update in February, the ramp up of the e-commerce logistics hub was slower than we expected, with utilisation rate standing at 18% (from 10% in November). We reckon it may take 1-2 years before the hub can reach a breakeven level, which we estimate to be at about 40-50%. Following which, we believe the group will enjoy significant operating leverage. 
  • Drivers of utilisation over the next 1-2 years include: 
    1. E-commerce partnership transaction with Alibaba. With Alibaba laying its foundation for long-term growth by pushing for more cross-border expansion, we believe strengthening of the partnership with Alibaba will likely drive more volumes on SPOST’s network. As an indication of scale, in the latest quarterly results of Alibaba, the group’s cross border and international consumer business earnings grew 288%, driven by growth in Aliexpress as well as consolidation of Lazada.
    2. Open network structure of the hub. One of the advantages of the e-commerce logistics hub is its open network model. With a network which is non-exclusive, this allows SPOST to tap into other commercial collaborations to load more volume onto its network. For example, the hub has tapped into marketplaces such as ASOS and also mono-brands such as beauty retailer Sephora Asia. We are also not ruling out possible collaborations with Alibaba-backed Lazada and Redmart.

Full-year contribution from SPC mall only in FY19. 

  • The redevelopment of SPC mall is expected to be completed in mid-17 and the leasing progress of the mall is on track.
  • Three anchor tenants have been secured - movie theatre operator Golden Village, supermarket franchise NTUC as well as food court chain operator Kopitiam. Rental income wise, we estimate that meaningful contribution will likely kick in towards 2H18 as it typically takes time for the mall to fill up and for retail areas to be outfitted. Full-year contribution will only kick in from FY19 onwards. We estimate full-year rental income from SPC mall to be in the range of S$8m-10m.


EARNINGS REVISION/RISK

  • Adjust our FY18-19 earnings downwards by 4-5% to reflect higher e-commerce losses. 
  • On our new estimates, we forecast a flattish three-year FY17-19F net profit CAGR of 3.3%.


VALUATION/RECOMMENDATION


Maintain HOLD and SOTP target price of S$1.46. 

  • While we remain positive on SPOST’s long-term prospects, we believe near-term earnings will continue to be hampered by transformation costs. 
  • Notably, losses at TG and the ramp-up of the ecommerce logistics hub will be key earnings headwinds for 2018. We are likely to turn more positive when we see a quicker scale-up in volumes in the group’s network so that it can derive sufficient operating leverage from economies of scale. 
  • Meanwhile, we reiterate that there will likely be a significant non-recurring impairment on TG, which had SPOST recording S$169.1m in goodwill in FY16. Entry price is S$1.30.


SHARE PRICE CATALYST

  • Better-than-expected earnings from TG.
  • Higher-than-expected growth in the e-commerce and logistics businesses.
  • Faster-than-expected utilisation at the e-commerce logistics hub.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-16
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.460 Same 1.460



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