UOB Kay Hian Research 2015-07-30: Singapore Post - 1QFY16 Transformation In Progress. Maintain BUY.

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/



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