Singapore Post (SPOST SP) - UOB Kay Hian 2017-05-15: FY17: Earnings Dip On TradeGlobal Losses, Still In Transformation In FY18

Singapore Post (SPOST SP) - UOB Kay Hian 2017-05-15: SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - FY17: Earnings Dip On TradeGlobal Losses; Still In Transformation In FY18 

  • SPOST’s FY17 underlying net profit (-25% yoy) was below expectations as revenue growth continued to be dampened by high transformation costs. 
  • So far, the structural decline in its core mail segment has yet to be offset by its e-commerce logistics endeavours, where material losses at TG have further clouded the group’s outlook. 
  • We believe time is needed for SPOST to drive synergies and volume on to its network and reiterate that it will still be in transformational phase in FY18.
  • Maintain HOLD with a lower SOTP target price of S$1.37. Entry price: S$1.25.



RESULTS


FY17 underlying earnings below our and consensus estimates. 

  • Singapore Post’s (SPOST) FY17 headline earnings declined 37% yoy to S$33.4m, largely due to exceptional items of S$82m, which comprised mainly the impairment of TradeGlobal (S$185m), partially offset by fair value gains on investment properties for SingPost Centre (S$109m). 
  • Stripping out exceptional items, underlying net profit declined 25% yoy to S$115.6m, below our and consensus expectations (93% of full-year estimates). 
  • The decline is largely due to losses at the US e-commerce business, costs related to regional e-commerce logistics hub and expansion at 4PX (owned through Quantium Solutions).

Revenue not growing fast enough. 

  • Top-line managed to increase 17% yoy on the back of contribution from its US e-commerce subsidiary, Couriers Please, as well as increased international mail revenue. 
  • Nevertheless, top-line growth was dampened by operating expenses (+23% yoy), where key items such as volume-related expenses (+29% yoy) and labour-related expenses (+15%) showed no signs of abating and continued to ground earnings uplift.


STOCK IMPACT


Large impairment of TG not a surprise. 

  • SPOST carried out a S$185m impairment charge for TG, which hit both goodwill and customer relationship. The loss was sizeable, where instead of a projected profit of S$9.4m for FY17, TG incurred a S$26m loss. This compared to FY16 net loss of S$1.6m when TG was acquired a year ago. 
  • We note operations were mostly impacted by labour cost pressure, the loss of two key customers (30-40% of entity’s revenue) as well as disruption in the US fashion retail industry. These challenges will continue to be present in FY18.

TG restructuring underway but losses still expected in FY18. 

  • Measures have since been in place to improve TG’s operating performance, such as warehouse automation and customer on-boarding efforts. 
  • As part of a turnaround plan, management highlighted that a rebasing of TG’s prospects is underway, which we believe could mean a potential downsizing of this entity. 
  • Given this and the possibility that SPOST may take time to recover the lost revenue from its two key customers, we lower our assumptions for TG’s revenue growth outlook. Our 3-year FY18-20 CAGR for e-commerce revenue now stands at 20%.

Postal: Structural decline showed no signs of letting up. 

  • The shift in revenue mix towards lower-margin international business saw postal operating profit decline 4.2% yoy.
  • With 4QFY17 charting a steeper decrease in domestic mail revenue (-8% yoy), we believe the decline in domestic mail is not yet easing. 
  • Going forward, we expect mail operating margins to remain suppressed as domestic mail revenue continues to be impacted by e-statements implementation and the shift to alternative online services.

Logistics: Still lack volumes. 

  • Operating profit dropped 39% yoy owing to the costs of developing its e-commerce logistics network, higher depreciation at the new e-commerce logistics hub as well as depressed industry freight rates and volumes. 
  • We believe margins at the logistics segment will continue to be squeezed by high transformation costs as volumes take time to ramp up.

Net cash; dividend payout of 66%. 

  • On a more positive note, SPOST turned in a slight net cash of S$2.5m (FY16: net debt of S$154m), driven by its strong cash generating capabilities as well as proceeds received from Alibaba
  • With big-ticket expansion projects mostly over, capex is estimated at a normalised S$60m-70m for FY18-20. 
  • A final dividend of 0.5 S cents/share was declared, bringing the annual dividend to 3.5 S cents per share, representing a payout of 66% of underlying net profit.


EARNINGS REVISION/RISK


Introduce FY20 earnings; cut FY18-19 earnings estimates by up to 15%. 

  • Our earnings revision reflects: 
    1. lower revenue growth assumptions at TG; 
    2. lower revenue assumptions at the mail segment to incorporate steeper decline in domestic mail; and 
    3. higher transformation costs, specifically relating to volume-related expenses, labour costs and depreciation. 
  • Based on our estimates, we project a 3-year net profit CAGR of 11.2%.


VALUATION/RECOMMENDATION


Maintain HOLD and lower SOTP target price to S$1.37 (previously 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. 
  • Losses at TG and costs incurred to build out the e-commerce logistics network will be key earnings headwinds for 2018. 
  • So far, the structural decline at the core mail segment has yet to be offset by its e-commerce logistics endeavours, where material losses at TG have further clouded the group’s outlook. 
  • We believe time is needed for SPOST to drive synergies and volume on to its network and we reiterate that it is still in transformational phase in FY18. 
  • Entry price: S$1.25.


SHARE PRICE CATALYST

  • Faster-than-expected recovery in TradeGlobal.
  • Faster-than-expected ramp-up at eCommerce logistic hub.
  • Higher-than-expected growth in the e-commerce and logistics businesses.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-15
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.37 Down 1.460



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