CIMB Research 2015-07-09: SingPost - Overhang removed with JV. Upgrade from Hold to ADD.

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/