Singapore Post - UOB Kay Hian 2016-10-04: Noise Fades, Value Remains; Upgrade To BUY

SINGAPORE POST LIMITED S08.SI

Singapore Post - Noise Fades, Value Remains; Upgrade To BUY

Since the unfolding of corporate governance issues in Dec 15 and management changes, SPOST’s share price has retreated almost 30% from its peak in early-15.
While some decline is warranted, we believe the market has not priced in its growth assets in e-commerce and logistics.
We changed our valuation methodology from DCF to SOTP to better reflect the valuation of each business segment.

Upgrade to BUY with a higher SOTP target price of S$1.77 (previously S$1.53).

We upgraded SPOST from a HOLD to BUY with a higher SOTP target price of S$1.77 (previously S$1.53).

Singapore Post's (SPOST) gradual transformation into a global e-commerce logistics provider has been largely written off in its valuation, which has seen more than S$1.4b in market capitalisation wiped out from its peak since early-15.
Based on yesterday’s closing share price of S$1.47/share, the value of core traditional mail business and property segment would altogether make up c.98% of current market cap of SPOST, which suggests that the growth assets in logistics and e-commerce ventures are undervalued.
We have shifted to a SOTP-based methodology for our valuation to more accurately assess the value accretion of nascent investments and better reflect the valuation characteristics of each business segment.
Based on our SOTP analysis, we arrived at a value of S$1.77/share for SPOST. On this basis, we upgrade our recommendation to BUY from HOLD.

We are cognisant that there remain uncertainties on SPOST, particularly with regard to the Alibaba second tranche investments, CEO change as well as lingering corporate governance concerns and kitchen sinking in FY17.
In addition, we see a potential for dividend cuts, as the group may adopt a dividend policy payout to align dividends with earnings. Nevertheless, what investors can look forward to in the next 12 months will be the appointment of a new CEO, initiatives by its new chairman and directors to improve corporate governance, as well as a focus on integrating the new acquisitions.

While there have been changes to SPOST’s CEO and composition of board of directors, one constant is the group’s commitment to transforming itself into a globally-recognised e-commerce logistics provider.
Since 2011, the group has invested over S$600m in its transformation process, including the pivotal acquisitions of TradeGlobal and Jagged Peak in 2015.

In our view, its investments and transformation since 2011 provides a platform for a conservative three-year net profit CAGR of 8.5%, underpinned by its logistics and e-commerce segments.
In the absence of major new investments, we expect its capex and investments to have peaked in FY16, and for its free cash flow to rise from S$169m (7.8 S cents/share) in FY17 to S$215m (10 S cents/share) in FY19.

While SPOST maintained its guidance of an interim 1QFY17 dividend of 1.5 S cents, we understand that a dividend policy review is underway to ensure sustainability as well as a clear link to underlying earnings.
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 S cents. While we continue to retain our assumption of an absolute dividend of 7.0 S cents p.a., pending management guidance, we believe a likely scenario could be in the spectrum of a 50-90% dividend payout.

As SPOST expands its ecosystem beyond the traditional mail business, initiatives in areas such as e- commerce are still at the nascent stage, where value may not have been fully captured by DCF models.
Furthermore, we also expect a more significant portion of valuation to arise from the redevelopment of the SingPost Centre, which is expected to be completed on 30 Jun 17.
We believe an SOTP valuation analysis will more accurately assess the value accretion of nascent investments and better reflect the valuation characteristics of each business segment.
Based on our new methodology, we upgrade SPOST to BUY with a higher SOTP target price of S$1.77.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-04

UOB Kay Hian SGX Stock Analyst Report BUY Upgrade HOLD 1.77 Up 1.530