Singapore Post (SPOST SP) - UOB Kay Hian 2017-08-07: 1QFY18 Earnings Decline But Expected, Given Ongoing Transformation

Singapore Post (SPOST SP) - UOB Kay Hian 2017-08-07: 1QFY18 Earnings Decline But Expected, Given Ongoing Transformation SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - 1QFY18 Earnings Decline But Expected, Given Ongoing Transformation

  • SPOST’s 1QFY18 underlying net profit (-25% yoy) was within our expectation.
  • Earnings were impacted by lower domestic mail volumes, increased competition in the logistics segment and costs from planned investments. 
  • We believe SPOST will still be in the transformational phase over the next few quarters, where the declining postal segment has yet to be mitigated by a ramp-up in the e-commerce logistics network. 
  • Maintain HOLD and unchanged SOTP target price of S$1.37. Entry price: S$1.25.


RESULTS

1QFY18 underlying profit fell 25% yoy, but within our estimate. 

  • Singapore Post’s (SPOST) 1QFY18 underlying profit declined 25% yoy to S$26.9m (22% of our FY18 forecast). Earnings were dampened by lower domestic mail volumes, costs from planned investments, increased competition in the logistics segment and expansion at 4PX.

Revenue growth dragged by e-commerce segment. 

  • Revenue grew 6.2% yoy on the back of contribution from both the logistics and postal segments, offset by a decline in the e-commerce segment due to TradeGlobal (TG) which was impacted by revenue loss from two large customers as mentioned in our last note.

Cost remained elevated on high volume-related expenses. 

  • As expected, revenue growth (+6% yoy) continued to lag operating expense (+11% yoy). This is largely due to an increase in volume related expenses (+15% yoy) on the back of a change in business mix with higher international mail dues and higher logistics volume related expenses.

e-commerce: Getting better as losses narrowed. 

  • There was an encouraging qoq improvement in the e-commerce segment in 1QFY18 as operating losses declined to S$4.2m from S$15m in 4QFY17. We expect losses to continue narrowing as management executes a turnaround plan for TG. 
  • More specifically, the group is focusing on warehouse automation, which we believe will help ease labour costs especially during the seasonal peak period in November-December. 
  • Additionally, we believe TG has acquired a few new customers since losing two key customers in 3QFY17. 
  • Meanwhile, Jagged Peak continued to perform above management’s expectations with higher earnings as it added new customers and processed increased volumes.

Postal: Further margin decline expected. 

  • Due to lower contribution from the higher margin domestic mail business (1QFY18: 39% of mail revenue vs 1QFY17: 47%), the postal segment saw operating profit decline 13.7% yoy to S$36.3m. While we expect international mail volumes to continue growing on the back of higher volumes from Alibaba, we believe postal margins may continue to decline on changing mix as international mail margins are relatively lower. 
  • Moreover, with the international terminal dues system taking effect, this may lead to further margin pressure. Nevertheless, the group is working through a number of mitigation strategies to lessen the impact of the terminal dues.

Logistics: Still awaiting more volume. 

  • The segment saw 1QFY18 operating profit decline 39% yoy to S$4.4m, largely owing to costs of building out the e-commerce logistics network, and price competitive pressure. 
  • Going forward, we believe margins will remain suppressed on expansion costs and competitive pressure until sufficient volume comes on stream to the network. Insofar, we are seeing some encouraging progress in volume and utilisation ramp-up. 
  • Indicatively, elog hub utilisation for warehouse has gone up to 65% (from 45% in 4QFY17) as SPOST bring on board Lazada to its warehouse space.


EARNINGS REVISION/RISK

  • No change to earnings. Based on our estimates, we continue to project a 3-year net profit FY18-20F CAGR of 11.2%.


VALUATION/RECOMMENDATION


Maintain HOLD and unchanged SOTP target price of S$1.37. 

  • While we remain positive on SPOST’s long-term prospects, we believe near-term earnings will continue to be hampered by transformation costs. 
  • Key earnings headwind for 2018 will be lower postal margins on a change of mix as well as costs to build the e-commerce logistics network. 
  • We believe time is needed to drive synergies and volume on to its network and we continue to hold the view that SPOST will still be in transformation phase in the next few quarters. Entry price is S$1.25.


SHARE PRICE CATALYST

  • Faster-than-expected recovery in TG.
  • Faster-than-expected ramp-up at e-commerce 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/ 2017-08-07
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.370 Same 1.370



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