Singapore Post - UOB Kay Hian 2016-01-20: Solid Progress In E-commerce Amid Organisational Transformation

Singapore Post - UOB Kay Hian 2016-01-20: Solid Progress In E-commerce Amid Organisational Transformation Singpost SINGAPORE POST LIMITED S08.SI 

Singapore Post (SPOST SP) - Solid Progress In E-commerce Amid Organisational Transformation 

  • The stock appears oversold as we believe it is business as usual for SPOST, with continuity from its updated organisational structure. 
  • Meanwhile, SPOST’s response to the recent corporate governance concerns shows its commitment to accountability. We await findings from the special audit and the new CEO appointment but maintain our positive view as SPOST is poised to benefit from rising e-commerce volume. 
  • Maintain BUY. Target price: S$2.23. 


WHAT’S NEW 


Key highlights from management meeting. 

  • We met up with management recently and this report highlights the key takeaways. 


STOCK IMPACT

 

• Business as usual. 

  • Following the resignation of CEO Dr Wolfgang Baier, there has been increased involvement from Singapore Post’s (SPOST) board and management to ensure a smooth transition period until a replacement is found. 
  • Deputy Chairman Mr Goh Yeow Tin was appointed as Executive Director for 12 months; Deputy GCEO Mervyn Lim is working as the interim GCEO with greater involvement from the Group chairman Mr Lim Ho Kee. 
  • In addition, Dr Wolfgang will support the handover until 30 Jun 16 or earlier. 

• Updated organisational structure to ensure continuity. 

  • Since 1 Dec 15, SPOST’s business will be based on four pillars, including e-commerce (headed by Mr Marcelo Wesseler), postal (headed by Mr Woo Keng Leong), logistics and operations (headed by Dr Sascha Hower) and corporate services (headed by Mr Mervyn Lim). 
  • On the ecommerce segment, we understand Mr Marcelo has been key in the expansion of this segment and he handles the key corporate relationships. The group’s e-commerce logistics solutions support more than 100 brands in Asia, including Canon, Calvin Klein and MUJI. 
  • As for the relationship with Alibaba, we understand the key person behind this relationship is SPOST’s Deputy CEO for International Mail, Goh Hui Ling. We anticipate Alibaba’s additional investments in SPOST (up 4.28% to 14.51%) and Quantium Solutions to complete by 29 Feb 16. 

• Strong cross-border e-commerce volume. 

  • In a recent business update, SPOST revealed that the group’s cross-border e-commerce volume rose 60% yoy in Nov 15 to 4.6m packages. 
  • Volumes tend to be strong in November as there are events such as Black Friday, Cyber Monday and Singles Day (11 November). The strong volumes should be reflected in 3QFY16 results, which are expected to be announced in the first week of February. 

• Now to realise the benefits. 

  • After three years of active M&As, management shared that the near-term focus will be on integrating and realising synergies from these acquisitions. 
  • Nonetheless, the company remains open to opportunistic investments that are in line with the SPOST 3.0 strategy. Recent acquisitions of TradeGlobal and Jagged Peak will allow SPOST to increase its exposure to the monobrand segment and also to expand into the US market alongside its existing Asia-based e-commerce clients. 

• Dividend target remains on track. 

  • With the redevelopment of Singapore Post Centre (SPC), construction of the e-commerce Logistics Hub, as well as the continuing investment in the POPStation network, capital expenditure is anticipated to remain high in FY16 at S$396.3m. 
  • Nevertheless, we understand SPOST is committed to deliver its target full-year DPS of 7.0 S cents/share, implying FY16F dividend yield of 3.6%. 
  • Also, the group had a strong net cash of S$87.8m (S$0.04/share) as of Sep 15. 

• Steps to address administrative oversight. 

  • As a result of its “administrative oversight”, SPOST will undertake a special corporate governance audit to address questions raised over its disclosure standards. 
  • SPOST has appointed PricewaterhouseCoopers as the Special Auditor. The special audit is expected to be completed in about one month, following which SPOST will announce a summary of the findings. 


EARNINGS REVISION/RISK 


• Slight cut in earnings to reflect redevelopment of SPC. 

  • We reduce our FY16-17 net profit forecasts by 1-3% to account for loss of rental income from the redevelopment of SPC. After the adjustment, we forecast net profit to grow at a reasonable 3-year CAGR of 11.2%. 
  • We have not factored in the impact from the acquisition of TradeGlobal, pending more information. 


VALUATION/RECOMMENDATION 


• Selling looks overdone; BUY with a DCF target price of S$2.23 (previously S$2.18). 

  • Despite the CEO departure as well as administrative oversight on the disclosure requirements on its M&A in 2014, we think SPOST remains compelling as a logistics and e-commerce proxy. 
  • Maintain BUY and DCF-based target price of S$2.23. 


SHARE PRICE CATALYST 

  • Higher-than-expected growth in the e-commerce and logistics businesses. 
  • Favourable findings from the special corporate governance audit.



Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-20
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.23 Up 2.18


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