Singapore Post Ltd - Maybank Kim Eng 2016-07-15: Testing Times Remain

Singapore Post Ltd - Maybank Kim Eng 2016-07-15: Testing Times Remain SINGAPORE POST LIMITED S08.SI 

Singapore Post Ltd (SPOST SP) - AGM: Testing Times Remain

Dividends, integration & goodwill could be tested 

  • We attended SingPost’s AGM yesterday where new Chairman Simon Israel gave his candid take on the state and future direction of SingPost. 
  • Although corporate-governance issues appear to have subsided, key matters including future dividends, M&A integration and goodwill impairment remain uncertain. 
  • Mr Israel expects blended ROEs to decline over time. The board is reviewing dividend payouts to ensure sustainability. 
  • We think the strength of its recent acquisitions will be tested in 3QFY3/17, their seasonally strongest quarter. 
  • Finally, management does not rule out goodwill impairment if the acquired entities miss expectations. 
  • Maintain SELL & DCF TP of SGD1.29.

Dividends under review

  • Mr Israel believes that the postal service is a “burning platform subject to disruption”. 
  • We think future dividends could be at risk, as SingPost’s payout will approach 100% by FY17. 
  • In addition, two major projects will require capex of around SGD150m. While raising debt for capex is possible, this will strain its balance sheet and earnings. 
  • The board is reviewing the feasibility of paying 7 SGD cts / share in future. This will depend highly on recurring income. 
  • Near term, more investments might be needed to drive its e-commerce segment, though the board noted that risks are lower in logistics and significantly higher in e-commerce.

Integration could be tested in 3QFY3/17

  • A critical milestone will be 3QFY3/17 results, in our opinion. This is the peak period for e-commerce. In this period, the results of integrating its recent larger acquisitions and core earnings can be judged more clearly. 
  • Management has avowed to do everything to ensure its M&As work but the main risk is execution, which we concur with. The board also highlighted that M&A integration could take a number of years to contribute substantially to the bottom line.

Goodwill impairment cannot be ruled out

  • While there was no goodwill impairment in FY16, the board highlighted that growth assumptions for its acquisitions will be tested in due time. If they fail to deliver, it will not hesitate to write down their goodwill. 
  • SingPost’s new CEO will also be crucial in reassessing the business.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-15
OCBC Securities SGX Stock Analyst Report SELL Maintain SELL 1.29 Same 1.29