Singapore Post Ltd (SPOST SP) - Maybank Kim Eng 2017-11-16: Most Sectors Turning; U/G To BUY

Singapore Post Ltd (SPOST SP) - Maybank Kim Eng 2017-11-16: Most Sectors Turning; U/G To BUY SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd (SPOST SP) - Most Sectors Turning; U/G To BUY


BUY for growth and turnaround of key segments 

  • We raise our FY19-20E EPS by 1-5% and DCF-based TP 23% to SGD1.50 after lifting the growth profile for mail business and projecting a turnaround for e-commerce. 
  • Accordingly, we U/G to BUY from HOLD. 
  • 2Q18 results were in line, 6M18 core earnings met 47% of ours and consensus FY17E. Evident in 2Q results was improvement in three out of four growth cylinders, including mail, e-commerce and associate earnings, which we believe will gain momentum. Logistics is the only uncertain part, but the earnings drag should be manageable.
  • Management’s strategic review appears sound as it focuses on several low hanging fruits and also targets driving long-term growth.



Strategic review targets executable initiatives 

  • The new CEO disclosed 4 themes in its strategic review. Although there is nothing fancy, we think the aims are practical and emphasize mostly on executable initiatives. Nonetheless, the third initiative is more ambitious and strives for longer term results. 
  • The themes are:
    1. establish market leadership in Singapore;
    2. deliver full value from overseas investments; 
    3. ignite future growth engine; and
    4. drive cost leadership.


2Q18 results mixed, but reflects some turning points 

  • In this result, we see three key earnings contributors that turned positive, while one continues to worsen. 
  • Positives:
    1. mail segment has reported an operating profit growth for the first time in five quarters;
    2. operating loss from the e-commerce segment continued to narrow; and 
    3. the associates and JV reported strong growth. 
  • On the negative front, the logistics segment went into loss due to doubtful debt for a key customer. Also, intense competition has resulted in the loss of business.


Changes to our EPS and key risks 

  • Based on this result, we tweaked our forecasts to raise the EBIT for the mail (contributes >90% of EBIT for FY18E) and e-commerce segments, offset by weaker logistics. EBIT for the logistics segment should remain subdued in FY18. 
  • Risks to our call are weaker-than-expected mail, logistics and ecommerce segments. Further weakening of logistics segment could offset the turnaround of mail and logistics segments.

Results Overview 

  • 2Q18 results were in line, 6M18 core earnings met 46% of ours and 51% of consensus FY17E. 3Q is typically the seasonally strongest quarter due to peak online shopping season. Topline grew 10% YoY but core earnings only grew 2% YoY.
  • The results were mixed with some positives and negatives.
  • What we liked: 
    1. Postal segment, the largest earnings contributor has reported an operating profit growth of 5%, the first growth in five quarters, as strong international mail revenue growth of 45% offset 8% revenue decline of domestic mail. The growth is largely contributed by higher volumes from Alibaba.
    2. Operating loss from the e-commerce segment continued to narrow to -SGD2.9m in 2Q18, from -SGD6.8m in 2Q17 and -SGD4.2m in 1Q18. Management continues to execute on the turnaround business plan for TradeGlobal.
    3. The associates and JV line reported strong growth, to SGD4.9m 1Q18, from SGD0.3m in 1Q17, due to improved performance from Indo Trans Logistics, an integrated logistics associate in Vietnam. 
  • What we disliked: 
    1. The logistics segment went into the red due to doubtful debt for a key customer, Quantium Solutions HK. Also, intense pricing competition has resulted in the loss of business. Even excluding the provision, the operating profit would have been SGD1m, much lower than the operating profit of SGD5m for 1Q17.
    2. Depressed operating margin for the postal business.


Swing Factors


Upside

  • Faster-than-expected turnaround of TradeGlobal, a newly acquired e-commerce enabler for fashion and lifestyle.
  • Higher-than-expected revenue growth in e-commerce logistics, from more customers and services.
  • Higher-than-expected margins for e-commerce logistics, from economies of scale and operating leverage.

Downside

  • Inability to resolve corporate-governance conundrum, including independence of the board and inadequate disclosure.
  • Failure to extract synergies and integrate its largest acquisition, TradeGlobal.
  • Worse-than-expected deterioration in mail business before e-commerce logistics compensates.




John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-11-16
Maybank Kim Eng SGX Stock Analyst Report BUY Upgrade HOLD 1.50 Up 1.220



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