Singapore Post Ltd - CIMB Research 2016-10-27: Signed, sealed, delivered

Singapore Post Ltd - CIMB Research 2016-10-27: Signed, sealed, delivered SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - Signed, sealed, delivered

  • SPOST completed its JV agreement with Alibaba today, whereby Alibaba invested S$86.2m for a 34% stake in SPOST’s subsidiary Quantium.
  • Regulatory approval granted to Alibaba to increase its stake in SPOST from 10.2% to 14.4% at the original agreed price of S$1.74/share.
  • We tweak our FY17-19F EPS to factor in higher logistics growth, partially offset by loss of earnings from sale of 34% stake in Quantium to Alibaba.
  • Upgrade from Hold to Add, with a higher DCF-based target price of S$1.76 (7% WACC). Stronger ecommerce logistics volume growth is the key catalyst.

Completed JV agreement with Alibaba for S$86.2m 

  • SPOST surprised us by announcing the completion of its JV with Alibaba today. We expected the JV to fall through given the significant overlap in logistics network between SPOST and Alibaba’s recently acquired Lazada. 
  • Under the JV agreement, Alibaba took a 34% stake in SPOST’s warehousing arm Quantium Solutions for S$86.2m (US$61.9m). This was slightly lower than the initial agreed price of S$91.7m.

Received regulatory approval for 5% share issuance 

  • Meanwhile, the Info-communications Media Development Authority granted regulatory approval to Alibaba to increase its stake in SPOST from 10.2% to 14.4%. 
  • The long-stop date has been extended to 28 Feb 2017 in view of the approvals required from SGX and shareholders via an EGM. The investment will be through the issuance of 107,553,907 new ordinary shares at S$1.74/share which will net S$187.1m in proceeds.

New firepower for investment in ecommerce logistics 

  • After deducting expenses of S$3.5m, net proceeds from the new share issuance would amount to S$183.6m. Of this amount, 75% (S$137.7m) is intended for investments in the ecommerce logistics business, while the remaining 25% (S$45.9m) is for general working capital purposes. 
  • Assuming the entire S$86.2m proceeds from the JV will be put into investments, SPOST would have S$223.9m at its disposal to invest in its ecommerce logistics network. We do not rule out further M&As or local partnerships.

JV to focus on ASEAN, Australia, New Zealand 

  • The JV’s focus will be to grow and enhance ecommerce logistics capabilities in ASEAN, Australia and New Zealand, by strengthening Quantium’s current network which spans across 11 markets. 
  • Quantium has warehousing and last mile delivery capabilities (in some countries through local partners) in all ASEAN markets except Indonesia. We think expansion plans could focus on entry into Indonesia as a priority, given its promise as the key ASEAN ecommerce market and current lack of logistics infrastructure.

Positive impact on earnings likely to come later 

  • With the JV being completed in 3QFY17, we think there may be a gestation period before investments kick in, especially with the new CEO expected to join at year-end. As such, we think earnings growth from new investments could only start to pick up from FY18. 
  • We adjust our FY17-19F earnings to factor in: 
    1. higher logistics revenue growth, 
    2. higher margins on operational efficiency, 
    3. loss of 34% of Quantium's earnings, 
    4. cash proceeds from the two Alibaba deals, and 
    5. an enlarged share base.

Upgrade to Add 

  • We upgrade SPOST from Hold to Add in view of the recent developments, which should boost logistics earnings growth in the medium term. 
  • Our DCF-based target price rises to S$1.76 (7% WACC), which implies 24x FY18F P/E. 
  • Downside risk to our rating could come from poor execution or drag on margins from investment startup costs.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-10-27
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.76 Up 1.490