Singapore Post - DBS Research 2018-02-05: Delivering A New Phase

Singapore Post - DBS Vickers 2018-02-05: Delivering A New Phase SINGAPORE POST LIMITED S08.SI

Singapore Post - Delivering A New Phase

  • Upgrade to BUY, Target Price of S$1.61.
  • Raising long-term growth outlook for SingPost.
  • Postal segment's margin decline may have bottomed out, eCommerce segment's turnaround in place, offsets pressures at logistics segment.
  • Interim dividend of 5 Scts declared.



Well-positioned to grow in FY19F and beyond; upgrade to BUY with new Target Price: S$1.61. 

  • We believe that its postal operating profit (~87% of the group) has bottomed out due to sharp growth in the international mail volume from eCommerce. SingPost has also demonstrated strong execution by narrowing losses at TradeGlobal, which we project to achieve breakeven in FY19F.
  • While competition is still intense in the logistics segment, it should benefit from an absence of one-off provisions in FY19F.
  • SingPost eCommerce-related revenue has grown 26.4% y-o-y and now forms 60% of total revenue. We believe SingPost is in a sweet spot to capture growth arising from eCommerce. 
  • SingPost offers ~2.8% to 3.4 yield with FY18F-20F earnings CAGR of 13%.


Where we differ: 

  • We now have a more positive view over the long-term growth outlook for SingPost. We believe that SingPost, being the dominant player locally with low cost of capital, is well -positioned to establish market leadership in Singapore’s fragmented eCommerce logistics sector .(~20% market share in parcels). 
  • Our earnings estimates are above consensus currently.


Potential catalyst: 

  • In the near term, any turnaround at SingPost’s eCommerce and logistics segments would be a major catalyst for its share price. 
  • In the medium term, we believe potential divestment of SPC mall could be a catalyst.


Valuation

  • Upgrade to BUY, Target Price of S$1.61. We use discounted cash flow valuation (WACC 6%, terminal growth rate 3%) to derive our Target Price of S$1.61. 
  • The stock offers a yield of ~2.8% to 3.4%.


Key Risks to Our View

  • Impact of increased terminal dues (increase in international small packets postage rates cannot negate rise in terminal dues) and further escalation of eCommerce losses could depress SingPost's bottom line in the medium term. 
  • The opening of Alibaba’s regional logistics hub also posts downside risk for SingPost.



WHAT’S NEW - Delivering a new phase


Revenues continue to grow; NPAT lifted by SPC Mall contribution. 

  • Headline revenues grew 11.7% y-o-y to S$412.8m (+16.4% q-o-q) across all three segments, driven by eCommerce-related peak season demand. NPAT was up 37.2% y-o-y to S$43.0m (+51.0% q-o-q), largely due to adjustments of deferred tax in respect of change in US tax rate and gains on disposal of PPE totalling S$9.88m.
  • Excluding one-off and exceptional items, underlying net profit improved 11.9% y-o-y, as SPC Mall rental start to contribute over S$4m this quarter with 85.9% occupancy rate. 
  • SingPost has declared an interim dividend of 0.5 Scts this quarter.

Postal segment's margins may show signs of stabilisation for the time being. 

  • Revenue grew to S$166.0m (+15.8% y-o-y, +11.9% q-o-q) as international mail volumes continued to grow 37.7% y-o-y (particularly with higher volumes from the Alibaba Group) while domestic mail revenue continued to decline on the back of e-substitution. The reported quarter saw particularly strong international mail volumes due to peak season (Double Eleven in November, Alibaba Group). 
  • Operating margins at 24.2% may show signs of stabilisation (1Q18: 24.2%, 2Q18: 23.7%), reversing the decline trend in the last six quarters. 
  • Overall, operating profit improved at S$40.1m (+4.0% y-o-y) on the back of higher revenues offset by lower margins.

Logistics segment continues to see pressure at Hong Kong. 

  • Logistics segment revenue grew 4.8% q-o-q and 1.5% y-o-y largely due to double-digit loss in revenue in Quantium Solutions Hong Kong, offset by higher last-mile deliveries in Singapore and Australia. 
  • Operating profit of S$4.9m was down 44.8% y-o-y largely due to higher in line haul and handling costs. We believe that competition in Hong Kong is unlikely to ease in the near term as existing and new players become more competitive. 
  • For SingPost’s freight-forwarding business, revenue growth has slowed to low single digits, as increased competition is observed in selected markets.

eCommerce losses narrowed on back on higher revenues. 

  • eCommerce segment's operating losses widened slightly from S$2.9m in 2Q18 to S$3.8m in 3Q18, as revenue continues to grow to replace loss of two major customers a year ago. In particular, TradeGlobal’s revenue grew 2.3% y-o-y while Jadded Peak’s revenue grew 43.9% y-o-y as new customers/brands were added to the portfolio. 
  • We note that the US operations have ran smoothly this peak season, in contrast to the cost overruns experienced last year, in part due to continued efforts in investing in automation.


Outlook and recommendation


Terminal dues impact to be seen in next quarter results. 

  • While we remain watchful of the impact of terminal dues, we think that a portion of the impact is negated with rise in postage rates for international small packets (see our previous note: Singapore Post: Higher postage rates for international small packets).

Raising long-term growth outlook for SingPost. 

  • Previously, we were cautious over the long-term growth outlook for SingPost, as the company was grappling with declining margins for its postal segment, its largest contributing segment, over the last two years as it transitions structurally, growing its international mail segment which has lower margins than that of domestic mail. At the same time, SingPost had to grapple with eCommerce losses.
  • However, SingPost has been making progress on managing the three fronts of its business under the leadership of its new CEO, Mr Paul Coutts. As SingPost concludes its strategic review, we believe that the company is well-positioned to establish market leadership in Singapore’s eCommerce logistics sector, where it is estimated to have ~20% market share in parcels locally. 
  • Going forward, we believe that automation processes and ongoing process improvements at Jagged Peak and TradeGlobal should reap more operational efficiencies. The turnaround plans are also evinced as seen in continued acquisition and on-boarding of new customers leading to ~20% revenue growth this quarter. We recognise that while the logistics segment may still see pressures in the near term, its contribution to total operating profit is < 5% for 9M18.
  • Contributions from postal and eCommerce segment should drive revenue and NPAT going forward.

Upgrade to BUY, Target Price of S$1.61.

  • We upgrade to BUY recommendation with Target Price of S$1.61, as we roll forward our valuation base to FY19F and raise our DCF long-term growth from 2% to 3% given our belief that 
    1. international mail segment growth momentum should continue 
    2. the turnaround in operations for the eCommerce segment seen over the past three quarters is sustainable. 
  • We are keeping our earnings for FY19F and FY20F intact. Earnings revisions for FY18F arose from exceptional items. 
  • Going forward, lower tax rates (arising from US tax changes) may also provide uplift for bottom line.




Sachin MITTAL DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2018-02-05
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 1.61 Up 1.230



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