Singapore Post (SPOST SP) - UOB Kay Hian 2017-11-16: 1HFY18 Earnings In Line; Operations Improving But Still In Transformation

Singapore Post (SPOST SP) - UOB Kay Hian 2017-11-16: 1HFY18: Earnings In Line; Operations Improving But Still In Transformation SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - 1HFY18: Earnings In Line; Operations Improving But Still In Transformation

  • Singapore Post (SPOST)’s 1HFY18 underlying profit of S$54.5m (-13% yoy) was within expectations.
  • Earnings were dragged by high operating expense, which exceeded revenue growth. Logistics languished on the back of a competitive operating environment, while postal and e-commerce saw improved performances. 
  • While transformation efforts seem to be making decent progress, we believe near-term earnings will still to be hampered by transformation cost. 
  • Maintain HOLD with SOTP-based target price of S$1.34 (previously S$1.37). Entry price: S$1.20.



RESULTS


1HFY18 underlying profit declined 13.2% yoy, in line with estimates. 

  • Singapore Post’s (SPOST) 1HFY18 underlying profit declined 13.2% yoy to S$54.5m, in line with our estimate. 
  • While 1H18 earnings form 44% of our full-year estimate, we reckon 2H18 earnings will be stronger, given peak periods of Singles Day, Black Friday and Cyber Monday which all fall in 3Q. 
  • Furthermore, 2H18 will progressively start to benefit from the rental income of SPC Mall which opened in Oct 17. The group declared an interim dividend of 0.5 S cents (compared to 1.0 S cent in 1HFY17).

Cost exceeded revenue growth. 

  • Operating expenses (+12.9% yoy) continued to rise faster than revenue growth (+8.2% yoy). This was largely due to higher volume- related expenses (+15.4% yoy) as the group sought to grow volumes to benefit from economies of scale from operating leverage.

Logistics: Quantium Solutions still a pain point, but elog ramping up well. 

  • In 2QFY18, the segment saw an operating loss of S$4.2m, largely due to doubtful debt provision for a key customer in Quantium Solutions Hong Kong. Furthermore, Quantium Solutions saw lower contribution in Hong Kong due to intense price competition, which resulted in a loss of business. We expect competitive pressures in Hong Kong to persist in the near term. 
  • On a more positive note, elog hub continued to ramp up well, where warehouse utilisation rose to 79% in 2Q18 (1QFY18: 65%, 4QFY17: 45%).

Postal: International mail profit offset decline in domestic mail. 

  • Postal operating profit rose 5.3% yoy in 2QFY18 on the back of strong international mail revenue growth (+45% yoy), driven largely by higher volumes from Alibaba Group
  • Despite garnering significantly lower margins (international mail margin is typically one-third that of domestic mail), the growth in international mail volumes has helped to offset the decline in domestic mail volumes, which continued to be impacted by the migration towards electronic statements and bills. 
  • We expect a good showing from postal in 3QFY18 as it is the peak period of the Singles Day collaboration with Alibaba. As an indication, we understand that SingPost has successfully handled 3-5x the normal volumes as a result of Alibaba’s Singles Day.

E-commerce: Losses narrowed on ongoing turnaround plans. 

  • There was an encouraging qoq improvement in the e-commerce segment as management continues to execute the turnaround business plan for TradeGlobal (TG). 
  • Management shared that TG has clinched new customers over the past months and is also automating its warehouses, which will help ease labour costs during the peak of 3QFY18. To give a sense of the progress, 2QFY18 operating losses declined to S$2.9m from S$4.2m for 1QFY18 and S$15m for 4QFY17. 
  • Meanwhile, Jagged Peak continued to perform well with higher volumes and new customers. TG is not expected to be profitable for FY18.

Update on strategic review, four key themes identified. 

  • SingPost updated on its strategic review where it identified four key themes of its strategy:
    1. win in home market and be the leading e-commerce logistics player in Singapore;
    2. deliver full value from overseas investments through integrating businesses across geographies and implementing a turnaround in TG;
    3. ignite future growth engines by strengthening strategic collaboration with Alibaba; and
    4. drive cost leadership to enhance competitiveness.


EARNINGS REVISION/RISK

  • We trim FY18-19 earnings by up to 5% to account for higher cost assumptions. Based on our estimates, we project a 3-year net profit CAGR of 9.5%.


VALUATION/RECOMMENDATION

  • Maintain HOLD with SOTP-based target price of S$1.34 (previously S$1.37). 
  • While we remain positive on SingPost’s long-term prospects, we believe near-term earnings will continue to be hampered by transformation costs. 
  • We believe time is needed to drive synergies and volumes on to its network and we continue to hold the view that SingPost will still be in transformation phase in the next few quarters. Entry price is S$1.20.


SHARE PRICE CATALYST

  • Faster-than-expected recovery in TG.
  • Faster-than-expected ramp-up at the e-commerce logistics 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/ 2017-11-16
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.34 Down 1.370



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