Singapore Post (SPOST SP) - UOB Kay Hian 2017-05-09: Japan Post’s Big Impairment Hit And What To Expect For SingPost

Singapore Post (SPOST SP) - UOB Kay Hian 2017-05-09: Japan Post’s Big Impairment Hit And What To Expect For SingPost SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - Japan Post’s Big Impairment Hit And What To Expect For SingPost

  • Japan Post recently disclosed a massive impairment charge on its largest acquisition in Australian logistic business, Toll Holdings, following poor performance. 
  • With a significant impairment risk to TradeGlobal looming, we believe Japan Post’s write-down could provide a preview of SPOST’s upcoming 4QFY17 results this Friday. 
  • Drawing parallels, we reckon SPOST may likely “wipe the slate clean” and book a large one-off impairment loss ahead of the new CEO coming on board in FY18. 
  • Maintain HOLD and SOTP target price of S$1.46. Entry price: S$1.30.



STOCK IMPACT


Acquisitions with rich premiums. 

  • Japan Post acquired Toll Holdings (Toll) for A$6.5b in 2015 at a hefty premium, where goodwill and trademark rights of A$5.3b accounted for 82% of the total purchase price. This is comparable to Singapore Post’s (SPOST) acquisition of TradeGlobal (TG), where goodwill alone made up 75% of the total purchase price.

Performance behind business plans.

  • Just less than two years of acquisition, performance at Toll fell significantly short of the business plans where FY17 EBIT declined 74% yoy, reaching less than 20% of the expected forecast by Japan Post.
  • Likewise, the business plan at TG has tracked below SPOST’s expectations, where we project net losses at TG to have grown to more than S$17m for FY17, compared to when SPOST first acquired TG a year ago (FY16 net loss: S$1.6m).

Cleaning up the cost of past legacies. 

  • Japan Post’s president, Nagato, who assumed position only in 2016 and was not involved in the Toll acquisition, had decided to bite the bullet and book a large one-off impairment charge. 
  • The decision for the rapid write-down was designed to “wipe the slate clean” and take JPOST to the “starting line for a more aggressive management stance”. This resulted in the company booking a massive impairment loss which wiped out nearly 90% of total goodwill and trademark rights at Toll, bringing Japan Post to its first annual loss.

Expect similar kitchen sinking exercise at SPOST. 

  • SPOST’s appointed CEO Paul Coutts is set to take the helm on 1 June. We will not be surprised if a similar kitchen-sinking exercise is implemented in 4QFY17, to start the new CEO’s FY18 term on a clean slate. 
  • At risk of impairment will be goodwill (S$176m) and customer relationships (S$43m) at TG. Considering a scenario where SPOST fully writes down the entire goodwill and customer relationships at TG, we estimate SPOST could potentially go into a headline loss, where FY17F P/B will increase from 2.2x to 2.6x, but this is still below its 5-year mean of 4.6x.

Positive investor reaction following write-down. 

  • The large write-down on Toll’s goodwill was met with positive reaction from investors where Japan Post’s share price to date has increased 2.3% since formal announcement. 
  • Should SPOST perform a large one-off impairment write-down on TG followed with clear communication on turnaround strategies, we reckon the market may react positively as it not only represents a one-off clean-up on SPOST’s books but also signifies the first step towards profitability improvement at its e-commerce wing.


STOCK IMPACT


Maintain positive outlook on Australia’s CouriersPlease. 

  • Poor performance at Toll was mainly due to the underperforming freight forwarding segment, where freight demand was hard hit by the sharp slowdown in Australia’s commodity sectors, such as mining and steelmaking. While SPOST currently has a relatively sizeable exposure to Australia (30% of group revenue), this is through its last mile parcel delivery company CouriersPlease.
  • We remain positive on the outlook of CouriersPlease and believe the parcel delivery segment will continue to be buoyed by the burgeoning online retail and e-commerce markets in Australia.

SPC mall to open in 2H17. 

  • SPOST recently signed a property management agreement with CapitaLand Mall Asia to manage the retail mall at the new SPC, which will open in 2H17. 
  • We view the appointment of CapitaLand positively as the latter has an established track record of successful marketing and management of retail spaces in Singapore and across Asia, which will give SPOST an edge, given the increasing competition in the Paya Lebar central area, and from the upcoming mall by Lendlease, which is set to open in 2H18. 
  • Moreover, with CapitaLand as its retail mall manager, SPOST will be able to optimise returns from this property while focusing attention on the core operations of postal services and e-commerce logistics.


EARNINGS REVISION/RISK

  • No change to earnings. 
  • We maintain 3-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 e-commerce logistic hub will be key earnings headwinds for 2018. 
  • We are likely to turn more positive when we see a faster scale-up in volumes in the group’s network so that it can derive sufficient operating leverage from economies of scale. Breakeven is estimated at 40-50% utilisation. 
  • Meanwhile, look out for the significant impairment on TG, which SPOST could record S$176m in goodwill and S$43m in customer relationships. Should TradeGlobal be fully impaired, we anticipate FY17F P/B to increase from 2.2x to 2.6x, but still lower than its five-year P/B mean of 4.6x. 
  • Entry price is S$1.30.


SHARE PRICE CATALYST

  • 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/ 2017-05-09
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.460 Same 1.460



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