UOB Kay Hian Research 2015-07-09: SingPost - A Stamp Of Credibility. Maintain BUY.

A Stamp Of Credibility

  • Alibaba’s follow-up investment in and collaboration with SPOST is a strong vote of confidence in SPOST’s ability to deliver and grow its e-commerce logistics capabilities in Asia. 
  • We think the cooperation will accelerate SPOST’s e-commerce transformation and we expect the growth to offset any potential earnings dilution. 
  • Maintain BUY. Target price: S$2.19. 

WHAT’S NEW 

  • In an announcement on 8 Jul 15, Singapore Post (SPOST) and Alibaba Group stated that they would expand their e-commerce logistics cooperation through the following initiatives: 
    1. Alibaba will invest up to about S$92m (US$67.9m) in Quantium Solutions International (QSI) for a 34% stake, 
    2. Alibaba Group will purchase 107.6m new ordinary shares amounting to 5% of the existing share capital of SPOST for S$187.1m (US$138.6m), and 
    3. SPOST and Alibaba have entered into a joint strategic business development framework to further improve efficiency and integration of e-commerce logistics solutions. 

STOCK IMPACT 


 A shot in the arm. 

  • We expect Alibaba’s investment (S$92m for a 34% stake) in QSI to accelerate the build-up of SPOST’s ecommerce logistics infrastructure and capabilities. It is likely to provide a platform for both parties to strengthen collaboration and realise synergies which will include e-commerce warehousing, last mile delivery and other endto-end ecommerce solutions. 
  • The remaining 66% stake in QSI will be held by SPOST. 
  • We estimate that QSI will contribute 22.7% of SPOST’s FY16 revenue and grow to S$242m. (FY14/15: S$202m) 

 Stamp of credibility. 

  • SPOST will raise about S$187.1m by issuing 107.5m new shares at a price of S$1.74/share. This represents a discount of 7.89% to the volume weighted average price of S$1.889 for trades done on the 7 Jul 15. 
  • We are encouraged by the willingness of Alibaba to pay 22.5% over the first subscription of SPOST’s shares which was transacted at S$1.42/share. This indicates the confidence that Alibaba has in SPOST to create value for its shareholders. 
  • Alibaba’s interest in SPOST will rise from 10.2% to 14.5% and we have not ruled out the possibility that SPOST will eventually end up as an associate investment for the Chinese E-commerce enabler in the future. 
  • Amongst many others, one of the close cooperation SPOST has with Alibaba is the transhipment of electronic products on Aliexpress. In addition, Aliexpress also partners SPOST for shipments to Brazil and Indonesia. 

 Net proceeds of S$184m. 

  • We estimate that out of the S$184m in net proceeds, S$133m (75%) will be invested in SPOST’s e-commerce logistic operations and Information Technology systems, while the rest will be used for general working capital. 
  • Management guided that SPOST’s objective is to be a cost efficient and reliable platform provider and does not base the group’s strategy on a specific client. 
  • We note that the proceeds will mainly be used to accelerate the company’s e-commerce transformation. 

 Building up a war chest. 

  • Post the capital infusion, we estimate SPOST to possess S$744m in cash balances and be in a net cash position of S$505.5m in FY16. This implies an annualised ex net cash FY16F PE of 20.7x and a free cash flow yield of 3.4%. 
  • With such a strong cash buffer, we think there is minimal downside risk to the group’s minimum dividend payout of 7 S cents/share (up from 6.25 S cents/share effective of 31 Mar 16). 
  • In addition, it is likely that SPOST will participate in more M&As as means to grow inorganically. 
  • We note that after a string of overseas acquisitions and JVs such as teaming up with Indonesian mobile phone retailer Trikomsel, the acquisition of Famous Pacific (90% stake) in New Zealand and Australian e-commerce company Hubbed holdings (30% stake), overseas revenue contribution has increased over the years. 
  • We hold a positive view on SPOST’s earnings diversification and its ability to operate in various markets through the means of partnering other postal service providers or building its own delivery capabilities. 
  • We expect the portion of overseas revenue to trend upwards. 

 The Alibaba story. 

  • Despite the paucity of data, we estimate that Alibaba’s FY16 revenue contribution from Southeast Asia is about 1.5% and given that SPOST is expected to be a priority partner when customers shop on AliExpress, we have assumed that 80% of the business will be awarded to SPOST. 
  • Having imputed 13% for Alibaba’s logistics and last mile delivery costs as a ratio of revenue, we expect this portion of Alibaba’s expenses to contribute S$35m to SPOST’s FY16 top-line. 
  • In addition, as SPOST ramps up volume through collaboration with Alibaba’s pass through volumes, we expect the group to enjoy operating leverage and economies of scale. 

EARNINGS REVISION/RISK 

  • No change. 

VALUATION/RECOMMENDATION 

  • Maintain BUY with a target price of S$2.19, based on DCF model. We have factored in the expected increase in number of shares for the full year of FY16 and note that despite the minimal EPS dilution, we have not yet worked in the entire earnings uplift from Alibaba’s contribution. 
  • We expect SPOST’s earnings growth (3 year CAGR of 12.1%) to outweigh the dilution (4.9%). 

SHARE PRICE CATALYST 

  • Faster-than-expected growth in e-commerce-related businesses. 
  • Strategic investments and M&As.


(Bennett Lee, CAIA; Andrew Chow, CFA)

Source: http://research.uobkayhian.com/




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