Overhang removed with JV
- With the formal announcement of SPOST’s JV with Alibaba, we believe that the biggest overhang on the stock has been removed.
- Though we only expect earnings to re-rate significantly in the medium term, investors are paid to wait with a dividend yield of 3.7%.
- We lower our FY16-18 EPS by 11% to adjust for dilution and loss of profits from the sale of 34% interest in Quantium Solutions, but our estimates leave room for upside from M&As.
- We upgrade our call from hold to Add, with a higher DCF-based target price S$2.07 (7% WACC) as we raise our terminal growth rate from 1.0% to 1.5%.
- Potential catalysts include M&As and volume growth from the Alibaba collaboration.
What Happened
- SPOST has entered into a conditional JV agreement with Alibaba, using SPOST’s wholly-owned subsidiary, Quantium Solutions (QS) as the vehicle for the JV. Alibaba will pay S$91.7m for a 34% stake in QS, while SPOST will retain the remaining 66% stake.
- SPOST also plans to issue 107.6m new ordinary shares at S$1.74/share (7.89% discount to the VWAP of S$1.889 on 7 Jul) to Alibaba, which will increase Alibaba’s stake in SPOST from 10.23% to 14.51% post-issuance.
- The net proceeds of S$183.6m will be used for expansion in e-commerce logistics (75%) and for general working capital (25%).
What We Think
- At S$91.7m, we estimate that Alibaba will pay 28x P/E for the 34% stake in QS. We view this positively as it establishes a floor for SPOST’s valuation.
- However, losing a 34% stake in its e-commerce logistics engine (QS) will likely lead to mild earnings dilution in the near term, and we cut our FY16 core net profit growth forecast to -2% (+5% previously). That said, the earnings shortfall can be mitigated with M&As using the S$229m proceeds (net of working capital).
- While we view the JV as a positive, we do not expect immediate volume growth as the biggest volumes are still in transhipments into/out of China, which SPOST already engages in.
- Within ASEAN, Indonesia is likely to be the key growth market, but infrastructure issues are likely to plague e-commerce growth in the near term.
- We are more positive on the medium-term impact, when SPOST capitalises on Alibaba’s volumes as they expand across Asia Pacific, which will lower the cost per parcel in a winner-takes-all market.
What You Should Do
- Upgrade to Add.
- Upon announcement of the JV, we believe that the biggest uncertainty on the stock has been removed.
- Though earnings growth may only accelerate in the medium term, investors are paid to wait with a 3.7% yield.
(Jessalynn CHEN)
Source: http://research.itradecimb.com/
