Singapore Post Ltd - CIMB Research 2016-10-11: Better corporate governance but other issues loom

Singapore Post Ltd - CIMB Research 2016-10-11: Better corporate governance but other issues loom SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - Better corporate governance but other issues loom

  • SPOST has implemented recommendations from the corporate governance (CG) review conducted by Heidrick & Struggles within the proposed 3-month time frame.
  • It has also strengthened its board with the appointment of three new board members, bringing the total board strength to 11.
  • Better CG could ease some concerns but we would watch for updates on the Alibaba deal (31 Oct), potential goodwill impairment and dividend cuts.

Appointment of three new directors, bringing total board size to 11

  • SPOST appointed three non-executive independent directors to its board on 10 Oct.
  • The appointments were made in line with a Board Composition Matrix and processes recommended by Heidrick & Struggles as part of the CG review.
  • With the appointments, SPOST now has 11 directors, of whom 7 are independent.
    • Mrs Fang Ai Lian, 66, formerly Chairman of Ernst & Young, brings financial/ accounting expertise to the board. She will join the Audit committee.
    • Ms Elizabeth Kong, 34, a lawyer at Morgan Lewis Stamford LLC, brings legal expertise to the board. She will be part of the Finance and Investment Committee and Nominations and Corporate Governance Committee.
    • Mr Bob Tan, 64, a Fellow of the Institute of Chartered Accountants of England and Wales and Chairman of Ascott Residence Trust, brings further financial/accounting expertise. He joins the Audit Committee and Board Risk and Technology Committee.

Largely implemented recommendations from the CG review

  • Besides the appointment of the three directors, SPOST reports that it has “substantially implemented all the CG recommendations” by Heidrick & Struggles (total of 29). We think there are still three recommendations that have not been met.
  • The first two recommendations not met are on strategic alignment and agility, and partnership between the Chairman and CEO, which understandably will only be implemented when the new CEO comes on board at the year-end.
  • The third is the appointment of a director with broad P&L leadership experience and e-commerce logistics experience. While the new directors add to diversity and strengthen the board’s financial and legal capabilities, we think the main letdown is the lack of experience in the e-commerce or logistics business.

Better corporate governance but other issues to worry about

  • All eyes will be on the 31 Oct deadline for SPOST’s two deals with Alibaba: 
    1. additional 5% share issuance at S$1.74/share, and 
    2. sale of a 34% stake in Quantium Solutions under the JV agreement. 
  • With Alibaba’s recent investment in Lazada, we think it no longer makes strategic sense for Alibaba to continue with the JV given the overlap in ASEAN logistics network between Lazada and SPOST.
  • SPOST is reviewing its dividend policy and is likely to shift to a sustainable payout ratio rather than a fixed DPS. We think a dividend cut in FY17 is likely as the current 7 Scts DPS implies a payout ratio above 100%, based on our current EPS forecast.
  • As the new CEO comes on board at year-end, we think impairment of goodwill could be on the cards to ease pressure and drive synergies from recent acquisitions. We would especially watch the acquisitions that SPOST likely overpaid for, including TradeGlobal (27x EV/EBITDA) and Couriers Please (50x P/E).

Maintain Hold; near-term earnings growth to be unexciting

  • We think near-term earnings growth will remain a challenge amid start-up costs at the e-commerce logistics hub and expansion costs incurred by TradeGlobal, Jagged Peak and SP Commerce leading up to the year-end peak period.
  • We maintain our Hold rating and DCF-based target price of S$1.49 (7% WACC). We would turn more positive when the three issues above are resolved and when the ecommerce segment sees sustainable profits even during the off-peak season.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-10-11
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.49 Same 1.490