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

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).

Underlying net profit fell mostly on transformation efforts 

  • 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 dragged by e-substitution 

  • 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%).

Scaling up to compete head on with intensifying competition 

  • 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%.

Front-end remains loss-making in preparation of peak season 

  • 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.

Lower interim DPS on revised dividend policy 

  • 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.

Maintain Add 

  • 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
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.760 Same 1.760