Singapore Post Ltd - CIMB Research 2016-07-07: If we were the new CEO...

Singapore Post Ltd - CIMB Research 2016-07-07: If we were the new CEO... Singpost SINGAPORE POST LIMITED S08.SI 

Singapore Post Ltd - If we were the new CEO...

  • SPOST is in the process of searching for a new CEO. We outline the key priorities that we think he/she could focus on, especially coming on board in a tough year.
  • We think impairment of goodwill for TradeGlobal (TG) could be on the cards, given aggressive growth assumptions, although Jagged Peak (JP) is likely to be spared.
  • A cut in DPS from 7 Scts to 6.25 Scts makes sense amid high capex in FY17-18. It will run out of cash in FY3/17 if the share issuance and Alibaba JV fall through.
  • We downgrade from Add to Hold and cut FY17-19 net profit by 5-9% for losses at TG and higher depreciation. Our DCF target price falls to S$1.49 (7% WACC).

Facing the hard truths

  • The incoming CEO is likely to face a difficult FY17, as: 
    1. TG is expected to incur a full year of losses (1.5 quarters in FY16), 
    2. full-year impact from loss of rental income from SPC mall (two quarters in FY16), 
    3. depreciation of S$7m for opening of ecommerce logistics hub, and 
    4. expected S$212m capex, S$167m dividends (vs. S$127m cash and S$223m operating cash flow) mean SPOST will be short of cash if either the 5% share issuance (S$187m) or JV with Alibaba (S$92m) does not materialise in FY17.

Take an upfront impairment of goodwill for TG

  • Seeing TG’s financials for the first time was like looking at a bad report card. It would have incurred S$1.6m net loss in FY16 (1.5% of core net profit). We estimate SPOST paid 27x EV/EBITDA for TG vs. 6x for JP. 
  • Goodwill assumptions have built in 23% average cash flow growth in for TG and 18% for JP. We think TG’s assumptions are demanding and taking upfront impairment would ease pressure to drive synergies. Our sensitivity analysis suggests impairment could amount to S$18m-91m.

Maintain edge with Alibaba even if JV does not materialise

  • Alibaba’s acquisition of Lazada could shake things up for the JV. Lazada has a larger warehouse and last mile network in ASEAN ex-Singapore than Quantium, the intended JV entity. 
  • Alibaba’s priorities are more aligned with Lazada’s than SPOST’s in terms of geographical reach and delivery times. SPOST’s competitive advantage is still its postal network. The CEO needs to ensure that SPOST remains relevant to Alibaba by driving cross-border volumes. 
  • We removed the JV from our base case, given multiple delays.

Balancing growth against dividends

  • The previous board recommended raising DPS from 6.25 Scts (paid since FY07) to 7 Scts. Dividend yield has now risen to 4.6%, but investors typically look at SPOST for growth, rather than yield. 
  • Based on our estimates, net cash outflow would amount to S$171m in FY17 but SPOST could see net cash inflow in FY18, assuming DPS is cut back to 6.25 Scts. 
  • We think it makes sense to pump cash into the transformation, rather than to reward shareholders for delays in Alibaba JV and second share issuance.

Downgrade from Add to Hold; brace for a turbulent year

  • We downgrade to Hold and cut FY17-19 net profit by 5-9% for losses at TG, higher depreciation and lower Quantium revenue. 
  • Our DCF-based target price falls to S$1.49 (7% WACC) as we bring forward capex from FY18 to FY17 and remove cash inflow from 5% share issuance to Alibaba and sale of 34% stake in Quantium. 
  • We see possible consensus downgrades from lofty expectations of 12% core net profit growth. 
  • Risks to our call include stronger synergies from TG/JP and a meaningful JV materialising.

Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-07-07
CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 1.49 Down 1.76