Singapore Post - UOB Kay Hian 2016-07-25: Unboxing A Slower FY17; Downgrade To HOLD

Singpost SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - Unboxing A Slower FY17; Downgrade To HOLD

We believe SPOST could see a potential kitchen-sinking exercise in FY17 as earnings will likely be reined in by integration headwinds and goodwill provisions from leadership changes.
Nevertheless, we continue to view positively SPOST’s steps to improve corporate governance, and deem its transformation to an e- commerce and logistics outfit as necessary.
We expect earnings to pick up in FY18.

Downgrade to HOLD. Cut our DCF-based target price to S$1.64. Entry price: S$1.40.

We downgrade Singapore Post (SPOST) to HOLD from BUY as we revise our earnings assumptions and forecasts for FY17-19.

In his AGM speech, Chairman Simon Israel said that while revenue growth in e-commerce logistics may be strong, it may take years before the acquired business contributes materially to bottom line.
In FY16, SPOST recorded a net loss of S$0.08m for newly consolidated TradeGlobal for the period 14 Nov 15 to 31 Mar 16. Had TradeGlobal been consolidated for the full year, it would have chalked up an EBITDA and net losses of S$8.6m and S$1.56m respectively.
We think the main drag on earnings stems from the amortization expense portion (customer relationships made up approximately 69% of TradeGlobal’s total identifiable net assets as of FY16).
We expect the full-year impact from TradeGlobal to be a drag on SPOST’s FY17 earnings due to higher amortisation expense, and lower-than-expected operating margin following integration efforts.

The business case for CP is slightly behind schedule, which we attribute to a slowdown in the economy. As an indication, in its latest annual report dated FY16, the cash flow growth rate assumption for CP was cut to 8.6% from 10% in FY15.
Nevertheless, we understand from management that SPOST has been making strides in achieving synergies through initiatives such as launching new international and domestic services, as well as improving on last mile delivery through the launch of POPstation, which enables customers to collect parcels at their own convenience.

Goodwill nearly doubled to S$493.5m from FY15 to FY16, in which the increase was largely driven by the TradeGlobal acquisition in December last year, which recorded S$169.1m worth of goodwill. We believe the newly appointed CEO (targeted to come in by end-Dec 16) could start with a clean slate with a potentially write-down of goodwill which does not match up to growth assumptions in FY17.

Under the current dividend policy, the group aims to pay an annual ordinary dividend of 7 cents/share, up from 6.25 cents in FY14. However, assuming a DPS of 7 cents, dividend payout would exceed 100% on our new earnings estimates for FY17.
We think it would make commercial sense for SPOST to review its dividend policy to align with earnings, so as to ensure sustainability for the business. Assuming an earnings-linked dividend policy, our sensitivity analysis indicates that a payout of 40-90% would mean an annual dividend of 2.8-6.3 cents, based on FY17F EPS of 7.0 cents.

The Alibaba-SPOST transaction has been delayed for the third time, with long-stop date pushed to 31 Oct 16. Since the acquisition of Lazada by Alibaba, we believe there has been a change in partnership dynamics between SPOST and Alibaba, which brings with it both “opportunity and complexity”.
Opportunity wise, we believe there is potential for synergy creation between the three parties, where SPOST can assist in last-mile delivery support for geographies where Lazada is not present in and vice versa. However, we also acknowledge the complexities involved, given the fast moving landscape of ecommerce and additional involvement of Lazada, where any business development may alter the dynamics amongst the three parties.

Mean operating expense assumption to account for:
1. execution risks from integration of TradeGlobal as well as higher depreciation and amortisation charges, and
2. longer-than- expected post-merger integration efforts at CP.

Downgrade to HOLD with a lower DCF-based target price of S$1.64 (from S$2.25).
We believe SPOST will see a potential kitchen-sinking exercise in FY17 as earnings will likely be reined in by integration headwinds and goodwill provisions from leadership changes.
Nevertheless, we continue to view positively SPOST’s steps to improve corporate governance, and deem its transformation to an e-commerce and logistics outfit as necessary.
We anticipate earnings to pick up in FY18. Entry price is S$1.40.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-25

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.64 Down 2.25