Singapore Post - UOB Kay Hian 2016-04-05: More Changes Ahead As SPOST Gains Grounds On E-Commerce And Logistics

Singapore Post - UOB Kay Hian 2016-04-05: More Changes Ahead As SPOST Gains Grounds On E-Commerce And Logistics Singpost SINGAPORE POST LIMITED S08.SI 

Singapore Post (SPOST SP) - More Changes Ahead As SPOST Gains Grounds On E-Commerce And Logistics 

  • We await findings from the special audit, and amid the latest corporate developments, we expect more changes ahead, especially at the board level. 
  • Nevertheless, we maintain our positive view as SPOST is poised to benefit from rising e-commerce volume. 
  • Maintain BUY with DCF-based target price of $2.23. 


WHAT’S NEW 


 Update on Special Audit. 

  • SPOST released an update on special audit and corporate governance review late last week. The special audit, undertaken by law firm Drew & Napier and PricewaterhouseCoopers, is in its final stages of completion. We believe that the deadline of completion could have been pushed back slightly due to the appointment of an additional joint special auditor Drew & Napier. 
  • A summary of the findings is expected to be released to shareholders in the month of Apr 16. 
  • Additionally, SPOST has appointed Heidrick & Struggles, a global provider of leadership consulting and solutions, as the independent consulting firm to undertake the firm's corporate governance review. 
  • An internal ongoing review, which commenced early last year, is also underway. The corporate governance review is expected to be completed by Jul 16, before the company's annual general meeting. 

 Possibly more changes at board level? 

  • Lim Ho Kee will step down as Chairman on 10 May 16 (during its expected FY results announcement) and as director in Jul 16 (Annual General Meeting). Independent director Low Teck Seng will replace Mr Lim as chairman by a unanimous board decision. 
  • Following commentaries from independent director Zulkifli bin Baharudin, we anticipate seeing further changes at the board level, as SPOST continues to make its transition to an e-commerce and logistics business. 
  • While this may spark further uncertainties among investors, in our view, this change in leadership may be a step in the right direction and represent a broader effort for potential board renewal. 
  • In addition, we are confident of continuity given the strong core management at its four business pillars; e-commerce, logistics and operations, postal and international mail. 

 Termination of JV. 

  • SPOST and Indonesian mobile phone retailer Trikomsel have mutually agreed to terminate a planned JV, PT Trio SPecommerce Indonesia, on grounds that it is no longer a good fit for SPOST’s future plans. 
  • We believe the termination of the partnership will not have a significant impact on SPOST’s ecommerce presence in Indonesia as the company continues to maintain a healthy partnership with Indonesia Post and local partners. 


STOCK IMPACT 


 Update on Singapore Post Centre. 

  • We understand that SPOST has secured two anchor tenants – movie theatre operator Golden Village as well as an established food court chain operator, and is closing on a potential supermarket franchise. 
  • Redevelopment of Singapore Post Centre remains on track and projected completion is mid-17. 

 Concrete benefits from cross-selling initiatives within monobrands. 

  • Following the acquisition of TradeGlobal and Jagged Peak, SPOST has increased the number of monobrand customers nearly five-fold to approximately 100, with branded names such as Cole Haan, Tory Burch, Hugo Boss etc. 
  • We believe the focus going forward will be on cross-selling across geographies, to bring US-based customers into Asia-Pacific and vice versa. One example of such cross-selling initiatives includes events and merchandise retailer IRONMAN, where SPOST was able to tap on its unique cross-border capability to bring the latter to Australia, through inventory management via Quantium solutions warehouse in Sydney, and last-mile delivery through Australia’s Courier Please. 

 Partnership to go the extra mile. 

  • The partnership between Alibaba and SPOST continues to play a pivotal role in driving SPOST’s cross-border ecommerce volumes and scale. Following executive chairman Jack Ma’s goal to increase overseas e-commerce revenue to 50%, Alibaba has been aggressively seeking businesses outside of mainland China. 
  • More recently, the Chinese company formed a strategic partnership with US Postal Service, in efforts to beef up presence in the US e-commerce markets. SPOST’s latest acquisitions in US TradeGlobal and Jagged Peak, in our view, could further complement Alibaba’s overseas expansion plans. 
  • In terms of Alibaba’s second tranche of investment in SPOST, our view is that Alibaba remains committed to the deal. The longstop date has been extended twice (Nov 15 and Feb 16), and both times, Alibaba committed to an extended date, which signifies the upside and value of a Alibaba-SPOST tie-up. The long-stop date for Alibaba’s second tranche of investment agreement has been extended to 31 May 16 but given the uncertainties over the timing of regulatory approvals, we would not be surprised if there is a further extension. 


EARNINGS REVISION/RISK 


 No change to earnings. 

  • We maintain our view that SPOST can deliver on a 7 S cents dividend payout as the company continues to maintain a healthy balance sheet, with capex anticipated to trend downwards after 2016-17. 


VALUATION/RECOMMENDATION 


 Maintain BUY with a DCF target price of S$2.23 (previously S$2.22). 

  • Despite the recent events unfolding at the board level, we continue to maintain that SPOST remains compelling as a logistics and e-commerce proxy. 
  • Moreover, the recent stepping down of its chairman could open doors to potential board renewal that may be beneficial to SPOST’s e-commerce and logistics outfit. 


SHARE PRICE CATALYST 

  • Favourable findings from the special audit. 
  • Completion of Alibaba’s second tranche of investment. 
  • Appointment of new CEO. 
  • Higher-than-expected growth in the e-commerce and logistics businesses.



Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.23 Up 2.22


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