Singapore Post Ltd - CIMB Research 2016-08-05: FY17 will be a slow year

Singpost SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - FY17 will be a slow year

1QFY17 net profit of S$35.8m in line with our expectations at 23% of our full-year forecast, but below consensus at 21%.
Under the new reporting structure: postal revenue +1% qoq, logsitics revenue -12% qoq, e-commerce revenue +51% qoq.
Noteworthy to us this quarter was the S$147m in short-term borrowings it took on, which we view as less certainty the Alibaba deals would come through in 2Q.

1QFY17 core net profit fell 11% yoy due to:
1. lower rental income from redevelopment of SPC retail mall,
2. higher depreciation from e-commerce logistics hub (ECLH) which achieved TOP in Mar, and
3. higher amortisation from TradeGlobal and Jagged Peak.
These are all issues we highlighted earlier in our note, If we were the new CEO...
This quarter also included an undisclosed amount in one-off cost for Quantium’s move-in to ECLH, recognised under admin expense. Excluding that, there were no surprises.

SPOST changed its reporting lines. The e-commerce segment now reports individual revenue from TradeGlobal, Jagged Peak and SP eCommerce. We think this is useful in tracking each entity’s progress in onboarding new customers/recognising synergies, and whether impairment of goodwill may be required.
Logistics now breaks apart Couriers Please and SP Parcels revenue from Quantium Solutions. Ancillary post office revenue (previously under retail & ecommerce) is now parked under postal (renamed from mail).

E-commerce revenue showed strong momentum of 51% qoq, but operating loss only narrowed slightly from S$5.1m to S$3.5m. This was due to the 42% qoq rise in operating expenses from investments in IT and operational capabilities and marketing and sales efforts to grow its customer base.
Logistics operating margin fell to 4.6% (4QFY16: 6.9%) on higher depreciation and moving-in cost incurred at ECLH. We expect logistics margin to remain under pressure as it may take time for occupancy to ramp up at ECLH.

SPOST generated S$78.6m in net operating cashflow (+33% yoy). Noteworthy was the S$147m in new short-term borrowings, though net debt improved to S$135m (4QFY16: S$154m), and net gearing fell from 12.8% to 10.9%.
The 5% share issuance and JV with Alibaba have a long-stop date of 31 Oct, and would net S$187m and S$92m, respectively, if they come through, more than enough to meet its capex needs. We see the new borrowings as a less sanguine view of the Alibaba deals coming through in 2Q.

We maintain Hold, with an unchanged DCF-based target price of S$1.49 (7% WACC).
We think the potential for dividend cuts is real, as SPOST reiterated it would review its dividend policy to have a clear link to underlying earnings.
Current annual 7 Scts DPS translates to 103% payout ratio based on our FY17 EPS forecast, which is not sustainable.
Other headwinds include potential impairment of goodwill and the possibility of Alibaba not coming through with the second round of share issuance and JV.

Jessalynn CHEN CIMB Securities | http://research.itradecimb.com/ 2016-08-05

CIMB Securities SGX Stock Analyst Report HOLD maintain HOLD 1.49 Same 1.49