Singapore Post Ltd - CIMB Research 2016-11-04: Doing the dirty work now for future volumes

SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - Doing the dirty work now for future volumes

2QFY17 core net profit of S$27.1m was below expectations as investments kicked in before volume growth. 1H formed 41%/40% of our/consensus full-year forecasts.
We expect an improvement in 3Q during the peak shopping season, which should bring some margin relief amid higher volumes.
New dividend policy will be based on 60-80% payout ratio vs. fixed DPS of 7 Scts previously. We think this is more sustainable amid investments in its network.

Maintain Add. We tweak our FY17-19F EPS for lower revenue and higher expenses, but our DCF-based target price stays at S$1.76 (7% WACC).

SPOST remains in the investing phase as it builds out its infrastructure in preparation for larger volumes. As such, its underlying net profit fell S$10.5m (-28% yoy) to S$27.1m.
S$8.5m of the decline was led by transformational efforts, including expansion into the lower-margin ecommerce logistics business, the opening of its new eCommerce Logistics Hub (ECLH) and redevelopment of the SPC retail mall; S$3.9m was due to lower postal operating profit as domestic mail volumes continued on a declining path.

Domestic mail revenue fell 5% yoy due to two key factors:
1. e-substitution, or business mail going digital, has led to a decline in letter mail volume; and
2. 2QFY16 revenue had some one-off effects from SG50, general elections and the World Stamp Exhibition that were not repeated this year.
Postal operating profit fell a faster 11% yoy due to a higher proportion of lower-margin international mail revenue of 46% (2QFY16: 39%).

In the logistics segment, SPOST saw pricing pressure amid intensifying competition in the last 3-4 months, as other players drove down pricing in expectation of higher volumes towards the peak season.
Along with startup costs at the ECLH, investments in capacity expansion at Couriers Please and lower freight rates at Famous Holdings, logistics operating profit fell 36% yoy as operating margin fell to a new low of 3.2%.

For the lack of yoy comparison as TradeGlobal and Jagged Peak were acquired in 2HFY16, ecommerce revenue was broadly flat (-2% qoq). However, operating losses almost doubled qoq to S$6.8m on IT investments and as competition for seasonal fulfillment labour in Cincinnati drove up costs.
We expect a significant improvement in 3Q amid the peak shopping season, though small losses would not be unexpected.

Interim DPS was cut to 1 Sct (1QFY17: 1.5 Scts), in line with a new dividend policy to pay out 60-80% of annual underlying net profit.
We cut our FY17F DPS to 5 Scts (77% payout ratio), which brings the yield down to 3%.
While the new payout ratio falls below expectations as SPOST has historically paid out 88-119% of underlying net profit, we think it is understandable in view of future investments to beef up its logistics network.

The S$182m ECLH solidifies SPOST’s position as a leading ecommerce logistics provider and long-term commitment to the game. While current utilisation of c.10% could drag on margins in the near-term, we think having the capacity and scale is necessary to weed out competitors in the long run. The backing of Alibaba should also help to scale up volumes quickly.
Maintain Add and DCF-based target price of S$1.76 (7% WACC).
Key risk to our call is significant earnings erosion if competition heats up too intensely.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-11-04

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