Singapore Post - UOB Kay Hian 2015-11-04: 1HFY16 ~ Slightly Below Expectations But Look Forward To FY17

Singapore Post - UOB Kay Hian 2015-11-04: 1HFY16 ~ Slightly Below Expectations But Look Forward To FY17 Singpost SINGAPORE POST LIMITED S08.SI 

Singapore Post (SPOST SP) 1HFY16: Slightly Below Expectations But Look Forward To FY17 

  • SPOST’s 1HFY16 earnings were below our expectations as costs remained elevated. However, its medium-term prospects remain positive and we think the redevelopment of SingPost Centre would further drive its exciting new retail concept. 
  • We reduce FY16-17 net profit forecasts by 8-9%. Maintain BUY. Target price: S$2.18. 


• 1HFY16 slightly below expectations... 

  • Excluding exceptional items, underlying net profit grew 1.4% yoy to S$77.8m. This accounts for 45% of our full-year forecast. Singapore Post (SPost) enjoyed a net gain of S$34m from the disposal of Novation Solutions and DataPost but this was partially offset by professional M&A fees. 

• …on elevated costs as company invests for the future. 

  • While 1HFY16 turnover growth of 20% yoy was within expectations, underlying growth was lacklustre due to a 2.8ppt yoy decline in underlying 1HFY16 net margin to 15.0%. This is because costs remained elevated due to the inclusion of recently acquired investments as well as costs pressure in segments such as labour (higher wages and additional headcount for expansion). 
  • Compounding the situation is a 7% yoy decline in rental/property-related income due to the impending redevelopment of Singapore Post Centre. 

• Delivering on dividends. 

  • A 2QFY16 dividend of 1.5 S cents/share, up 20% yoy (2QFY15: 1.25 S cents/share) was declared. This is within expectations and we think the group is on track to deliver a full-year DPS of 7.0 S cents/share, implying FY16F dividend yield of 3.7%. 


• Further initiatives to drive e-commerce. 

  • We are upbeat on SPost’s recent acquisitions of TradeGlobal and Jagged Peak. While near-term contributions will be difficult to assess, we think TradeGlobal’s integrated e-commerce enablement solutions platform will allow SPost to expand into the US market along with its existing Asia-based e-commerce clients. 
  • More details on the financial implications from these acquisitions will be provided by management post the completion of the acquisitions, which we expect to be in the next 1-2 months. 

• Integration is next. 

  • After its recent acquisitions, the near-term focus will be to consolidate and integrate the new acquisitions. As for the extension of the long-stop date for the completion of Alibaba’s second investment agreement to 29 Feb 16, the group attributed this to pending regulatory approvals but in terms of collaboration with Alibaba, this is growing rapidly. 

• Convergence of online and offline retail; potential upside from FY18. 

  • The group recently announced more details on the redevelopment of Singapore Post Centre into a new retail mall which will cost S$150m and have an estimated gross floor area of 25,000sqm. The projected completion is mid-17. 
  • Based on our conservative assumptions, the mall could be worth up to S$493m when completed (assumed rental of S$12psf /month and a cap of 5.5%) with an estimated annual pre-tax profit of S$12m. 
  • We have not factored this into our FY18 estimates but our back-of-the-envelope calculation suggests this could raise our FY18 net profit forecast by 3%. More importantly, we think the new retail mall will support its transformation as a global e-commerce logistics player by converging online and offline retailing. 
  • The group’s revolutionary retail concept will be know as O² (O-squared). 


• Reduce earnings forecasts to build in more costs but eyes on the future. 

  • We reduce our FY16-17 net profit forecasts by 8-9%. Revenue and earnings are projected to grow at a 3-year CAGR of 14.5% and 12.9% respectively. 


• Still on our BUY list with a DCF-based target price of S$2.18 (previously S$2.19). 

  • SPost remains compelling as a logistics and e-commerce proxy. We see medium-term upside from its recently announced M&A as well as redevelopment of Singapore Post Centre (from FY18 onwards). 


  • Higher-than-expected growth in the e-commerce and logistics businesses.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.19 Up 2.18