Singapore Post - UOB Kay Hian 2016-08-05: 1QFY17 No Surprises; Expect A Longer Lead Time For Delivery

Singpost SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - 1QFY17: No Surprises; Expect A Longer Lead Time For Delivery

SPOST’s 1QFY17 net profit is in line with our expectation.
We maintain the view that FY17 earnings will continue to be reined in by integration headwinds and potential goodwill provisions from leadership changes.
Nevertheless, we are optimistic for earnings momentum to pick up from FY18 as new acquisitions start to unlock value on the back of a fully-integrated ecommerce logistics outfit.

Maintain HOLD with a lower DCF-based target price of S$1.53 (previously: S$1.64). Entry price: S$1.38.

Singapore Post (SPOST) reported 1QFY17 underlying net profit of S$35.8m (-11.2% yoy), in line with our FY17 forecast (23% of our full-year estimate).
Earnings were impacted by loss of rental income arising from SPC retail mall redevelopment, depreciation charges for Regional eCommerce Logistics Hub and continued investment in e-commerce. The deceleration in earnings was not unexpected (see our note dated 25 Jul 16) as we had highlighted FY17 earnings will likely be dragged by continued integration efforts and potential goodwill provisions.
Additionally, we understand SPOST’s earnings are subject to seasonality where 3Q earnings are typically stronger on the back of events such as the likes of Singles’ Day, Black Friday and Cyber Monday promotions.

1QFY17 revenue increased 30.9% yoy, supported by continued growth in cross-border e-commerce related activities and inclusion of new US acquisitions - Trade Global and Jagged Peak.
As an indication, e-commerce related revenue in 1QFY17 comprises nearly half (49.3%) of group revenue, up from just 28.7% in 1QFY16.

Expense growth of 33.6% yoy exceeded top-line growth, driven by inclusion of new subsidiaries and growth in business volumes.
Notably, volume-related expenses increased 50.5% yoy to S$160.9m, representing nearly half of group revenue. The increase reflects the growth in international mail traffic as well as increased e-commerce logistics volume as part of SPOST’s transformation. We believe operating leverage from new capacity and investments is likely to only kick in as of 3QFY17.

For 1QFY17, we see an improvement in operating cash flow where net cash from operating activities rose 33% yoy to S$78.6m.
We also expect capex to decline from FY17. As an indication, cash for capex and investment fell 24% yoy in 1QFY17, leading to a cash build- up to S$232.8m as of 1QFY17 (from S$126.6m in FY16).

SPOST maintained an interim 1QFY17 dividend of 1.5 cents. However, it will be reviewing its dividend policy to ensure it is sustainable and linked clearly to underlying earnings.
We believe the review makes commercial sense as current dividend policy of 7 cents per share per year exceeds 100% of our FY17 estimate.
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.

Recall that goodwill nearly doubled to S$493.5m from FY15 to FY16, largely driven by TradeGlobal acquisition completed in Dec 15, which recorded S$169.1m in goodwill.
SPOST highlighted that no provisions for goodwill were made in 1QFY17 as new acquisitions - TradeGlobal and Jagged Peak - were completed less than a year ago, and other acquisitions have yet to encounter any impairment issues. That said, we believe it is possible the new CEO may carry out a kitchen-sinking exercise to write down goodwill which does not match up to growth assumptions in FY17.

Maintain HOLD with a lower DCF target price of S$1.53 (previously S$1.64), based on a slight downward adjustment of our terminal growth rate assumption from 2% to 1.5% as we take a more conservative outlook amid the increasingly competitive e-commerce and logistic industries.
We maintain the view that FY17 earnings will be impacted by integration headwinds and potential goodwill provisions from new leadership changes. That said, we are optimistic for a pick-up in earnings growth from FY18 as new acquisitions start to unlock value on the back of a more integrated e-commerce logistics outfit.
Entry price is S$1.38.

Andrew Chow CFA UOB Kay Hian | Thai Wei Ying UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-05

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.53 Down 1.64