Singapore Post (SPOST SP) - UOB Kay Hian 2016-10-28: Pieces Fall In Place As SPOST-Alibaba Deal Draws To A Close

SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - Pieces Fall In Place As SPOST-Alibaba Deal Draws To A Close

Last night, SPOST announced the completion of a JV agreement with Alibaba in relation to Quantium Solutions.
Additionally, IMDA approved Alibaba’s investment of S$187.1m to increase its stake in SPOST to 14.4% (from 10.2% currently), with targeted completion by 28 Feb 17.
SPOST remains compelling as a logistics and ecommerce proxy, which we anticipate to be strengthened via its enhanced partnership with Alibaba.

Singapore Post (SPOST) announced:
1. the completion of Alibaba’s investment of S$86.2m for a 34% stake in SPOST’s logistic subsidiary Quantium Solutions (QSI), and
2. regulatory approval obtained for Alibaba’s second investment of S$187.1m to raise its stake in SPOST to 14.4%.

SPOST completed its joint venture agreement with Alibaba, where Alibaba invested S$86.2m for a 34% stake in QSI. QSI will essentially serve as a common platform for the two entities to grow and enhance e-commerce logistics capabilities in Southeast Asia and Oceania.
The collaboration is said to concentrate on solidifying QSI’s end-to-end e-commerce logistics network, and developing scale for future profitability.

The Info-communications Media Development Authority (IMDA) has approved Alibaba to increase its stake in SPOST to 14.4% from 10.2% currently, at S$1.74/share.
This deal is targeted to complete by 28 Feb 17 in light of the timeline required to obtain the remaining approvals from SPOST’s shareholders at an Extraordinary General Meeting and from the Singapore Exchange for the listing, quotation and trading of new shares.

Meanwhile, we note that Alibaba has expanded its annual promotions for Singles Day to 24 days, instead of the usual 24 hours.
This year, Alibaba expects to surpass the record S$14.3b in sales on Singles’ Day in 2015 through rolling out new activities like virtual fashion shows as well as augmented reality games to entice shoppers. We believe this new “extended holiday” may allow Alibaba to capture a bigger share of the wallet, which in turn may translate to higher international volumes for SPOST.
We also anticipate international mail volumes in 3QFY17 to be seasonally higher as SPOST gears up for events with the likes of Cyber Monday, Black Friday and Singles Day.
We estimate international mail revenue to grow at a three-year CAGR of 11.4% in FY17-19.

With the Alibaba deal almost completed, we expect attention to be on SPOST’s dividend policy review. The review is currently underway to ensure sustainability as well as linking it to underlying earnings.
While SPOST maintained its absolute dividend in 1QFY17, we believe a payout based on underlying net profit would be beneficial to SPOST’s transformation and integration journey as it allows sustainability and reinvestment on business for growth. Assuming an earnings-linked dividend policy, our sensitivity analysis indicates that a payout of 50-90% would indicate an annual dividend of 3.5-6.3 S cents, based on FY17F EPS of 7.0 cents.

No change to our earnings forecasts. We estimate a three-year net profit CAGR of 8.5% for FY17-19.

Maintain BUY with SOTP target price of S$1.77, based on DCF valuation methodology for mail (WACC: 6.5%, rf: 2.5%), 7.1x 2017F EV/EBITDA for the logistics business, 2.2x 2017F price/sales for the e-commerce business and a cap rate of 6.0% for its properties.
We believe current valuation remains attractive as the value of its core mail and property businesses account for 94% of SPOST’s current value per share (based on yesterday’s closing price), which potentially suggests that logistics and e-commerce ventures are undervalued.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-28

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.77 Same 1.770