Singapore Post Ltd - Maybank Kim Eng 2016-06-13: Pain Before Gain

Singapore Post Ltd - Maybank Kim Eng 2016-06-13: Pain Before Gain SINGAPORE POST LIMITED S08.SI 

Singapore Post Ltd (SPOST SP) - Pain Before Gain


Transformation far from over

  • SingPost started its M&As in 2011 to evolve from a domestic-mail monopoly into an international e-commerce logistics provider. Although it now provides various e-commerce logistics services in the Asia Pacific, most of its acquisitions have not added much to synergies or earnings. 
  • A pending second investment by Alibaba may also be under threat, while recent newsflow on corporate governance appears not over. 
  • Initiate with SELL and a DCF-based TP of SGD1.29 (WACC 11.3%, LTG 1.0 %). 
  • Near term, we expect SingPost’s dominant cash-cow mail business to provide support.


Not yet formidable e-commerce player

  • We foresee a long gestation period for SingPost’s M&As, as: 
    1. its acquired businesses are small players in their fields facing intense competition; 
    2. they have only diversified and bumped up its revenue but not yet added much to earnings; and 
    3. more investments would be needed for its customer acquisitions and scale economies, in our reckoning.


At risk: Alibaba’s second investment

  • Alibaba’s second investment in SingPost is taking much longer than its first in 2014. Its long-stop date has been extended three times. SingPost attributed the delays to slow regulatory approval. We see risks of the deal falling apart, as Alibaba might choose to expand its ASEAN logistics capability in-house using Lazada’s own logistics network.
  • SingPost is a national postal provider that has branched into global e-commerce and fulfilment logistics services.


Corporate-governance overhang

  • Investors’ confidence in SingPost has been dented since its CEO’s abrupt resignation in Dec 2015, followed by revelations that one of its directors had omitted the disclosure of his interest in a previous acquisition. Since then, its chairman and two directors have agreed to step down. 
  • While a new chairman has been appointed, SingPost is still searching for a new CEO. We think the air may not clear in the near term, as: 
    1. results of a corporate-governance review by Heidrick & Struggles will be due in Jul 2016; and 
    2. there could be more investigations into breaches of the Companies Act by ACRA since it started investigating in May 2016.


Peak valuations; SELL

  • We believe investors are too optimistic and have not priced in the potential for further negative newsflow. 
  • The street’s 14% YoY EPS growth could also fall short from a loss of rental income and TradeGlobal’s drag. 
  • SingPost is trading near its peak valuation and at 1SD above its 10-year mean of 22x FY17E P/E. 
  • Initiate with SELL with our DCF TP implying 18x FY3/17E EPS, a 6% premium to its 10-year forward P/E mean.


Swing Factors


Upside

  • Faster-than-expected turnaround of TradeGlobal, a newly-acquired e-commerce enabler for fashion and lifestyle.
  • Higher-than-expected revenue growth in e-commerce logistics, from more customers and services.
  • Higher-than-expected margins for e-commerce logistics, from economies of scale and operating leverage.

Downside

  • Inability to resolve corporate-governance conundrum, including board’s independence and disclosures.
  • Failure to extract synergies and integrate its largest acquisition, TradeGlobal.
  • Worse-than-expected deterioration in mail business before e-commerce logistics compensates.



John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-13
OCBC Securities SGX Stock Analyst Report SELL Initiate SELL 1.29 Same 1.29


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