1QFY16: Transformation In Progress
- SPOST delivered record-high revenues and net profits on the back of a 44% yoy growth in logistics revenue and M&As activities including the divestment of three mail printing entities.
- We expect e-commerce related activities to continue driving earnings growth and help offset the group’s lacklustre mail segment.
- SPOST’s business prospects continue to remain positive.
- Maintain BUY with a target price of S$2.19.
RESULTS
- Results are within expectations with 1QFY16 revenue and underlying net profit representing 23.9% and 23.1% of our full-year estimates respectively. Singapore Post’s (SPOST) underlying net margins declined marginally to 15.8% from 17.7% on the back of tepid growth within the traditional mail segment and rising labour- and volume-related expenses.
- 1QFY16 revenue grew 20.7% yoy, underpinned by growth in e-commerce activities. Driven by revenue contributions from Quantium Solutions (+74% yoy) and Famous Holdings (+34% yoy), 1QFY16 logistics revenue grew 43.6% yoy with operating margin improving to 4.7% (1QFY15: 3.9%). Retail and e-commerce revenue grew 5.6% yoy driven by new customer acquisitions and the group’s front-end web solutions business. SPOST’s mail segment continues to face tepid growth with mail revenue increasing 1.6% yoy. Revenue from domestic and international mail grew 5.7% and 0.1% yoy respectively.
- Operating cost pressures likely to remain high as 1QFY16 labour and volume related expenses grew 13.6% yoy and 35.9% yoy respectively.
- An interim dividend of 1.5 cents/share was proposed. We note that SPOST aims to pay out a total minimum annual dividend of 7.0 cents/share. This implies a yield of 3.6%.
STOCK IMPACT
• Divesting mail printing entities...
- In Jun 15, SPOST divested 90% of its stake in DataPost Pte Ltd (DataPost) for S$39.3m.
- This came on the back of having divested 100% of the group’s stake in Novation Solutions Limited (Novation) and DataPost (HK) Pte Limited (DataPost (HK)) for S$24.4m in May 15.
- The group is expected to record an estimated gain of above S$30m from the three divestments which will be recognised in 1HFY16 (one-off gains on sale of investments, property, plant and equipment of S$9.8m were recorded in 1QFY16).
- We understand that the three entities contribute less than 5% of SPOST’s total mail revenue and view favourably that the proceeds will go towards building the more earnings accretive logistics segment.
• … while SPOST continues to invest in its logistic capabilities.
- M&A will continue to be a key focus to strengthen SPOST’s presence in Asia Pacific and help broaden its logistics network.
- Under its subsidiary, Famous Holdings, SPOST acquired 80% of FPS Rotterdam at about S$12.6m in Jul 15.
- We think the acquisition was done at single digit to high teens P/E within market and industry peer valuations.
- Strategically, FPS Rotterdam expands SPOSTs freight network and helps establish entry points into various European markets.
- However, management guided that its primary focus for e-commerce logistics at this point remains in Asia Pacific.
- In addition, SPOST invested in 30% of HUBBED Holdings at S$4.6m in Jun 15, in alignment with the group’s pursuit to solidify its last mile delivery capabilities. HUBBED Holdings has a network of 680 news agents capable of providing parcel deliveries to each major city across Australia.
• Transformation in progress.
- As a result of prior investments in the group’s logistic network and M&As including the divestment of subsidiaries, SPOST delivered record high revenue and net profit for 1QFY16. Logistics revenue grew 43.6% yoy mainly driven by revenue contributions from Quantium Solutions (+74% yoy) and Famous Holdings (+34% yoy).
- We expect revenue contribution from e-commerce related activities to grow.
- Currently, we approximate e-commerce contributes to about 28% of the group’s revenue.
EARNINGS REVISION/RISK
• No change to our FY16 and FY17 earnings forecasts.
- We expect revenue and earnings to grow at a 3-year CAGR of 14.1% and 12.1% respectively.
- Key risks include failure to counteract the decline in traditional mail and rising costs, particularly manpower costs.
VALUATION/RECOMMENDATION
• Maintain BUY and DCF-based target price of S$2.19.
- Currently at 24.1x FY16F PE with an expected dividend yield of 3.6%, we think SPOST is trading attractively compared with its logistic and e-commerce peers who are trading at a higher average of 29.0x FY16F PE with a lower expected yield of 1.2%.
SHARE PRICE CATALYST
- Higher-than-expected growth in the e-commerce and logistics businesses.
- Strategic investments and M&As.
(Bennett Lee, CAIA; Andrew Chow, CFA)
Source: http://research.uobkayhian.com/
