Singapore Post Ltd (SPOST SP) - Maybank Kim Eng 2016-11-07: Transformation drags; D/G to HOLD

SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd (SPOST SP) - Transformation drags; D/G to HOLD

2Q17 earnings declined 28% YoY and missed our expectation by 5% due to high transformation investments and weaker postal performance. Core earnings for 6M17 met 41% of our FY17E.
While results may improve longer-term, most transformation costs should continue medium-term, including:
1. depreciation of new logistics hub;
2. investment in US ecommerce business; and
3. investment in associate, 4PX.

We cut our FY16-18E EPS by 8-14% for higher investment costs and adjust for Alibaba’s investments. Our DCF-based TP falls 1% to SGD1.75 (WACC 7.6%, LTG 1%) from SGD1.77.
Downgrade to HOLD for lack of near-term catalysts, after the share price rally due to Alibaba excitement.

We note that the benefits from various transformation investments will take time to materialise.
In addition, SingPost targets to invest the bulk of Alibaba’s proceeds (75% investments, 25% working capital) to build scale and bridge gaps in the e-commerce logistics space regionally.
On the other hand, ramping up of businesses might take time. For instance, the new logistics hub, which is running at around a 10% utilisation rate, will ramp up gradually to reach critical mass. Then, the investment in the new US e-commerce business could continue.
Competition wise, SingPost is starting to see it intensify in the lucrative e-commerce logistics space, especially when the year-end peak season approaches.

On the positive front, SingPost is confident it can stand against the competition as its robust platform offers both mail and commercial logistics. Also, it targets to reduce per unit costs as it scales up.
Operationally, the international mail revenue remains healthy, growing 19% YoY in 2Q17, as trans-shipment volumes continued to grow.

We cut our FY17-19E dividends by 7-28%, to reflect:
1. SingPost’s new dividend policy based on payout ratio of 60-80% of underlying net profit; and
2. our earnings cut.
We lowered our estimated payout ratio to 70- 80% from 80-90% previously.
Dividend yields for FY17-19E are 2.7-3.9%.

Faster than expected turnaround of TradeGlobal, a newly acquired e-commerce enabler for fashion and lifestyle.
Higher than expected revenue growth in e-commerce logistics, from more customers and services.
Higher than expected margins for e-commerce logistics, from economies of scale and operating leverage.

Inability to resolve corporate-governance conundrum, including board’s independence and disclosures.
Failure to extract synergies and integrate its largest acquisition, TradeGlobal.
Worse-than-expected deterioration in mail business before e-commerce logistics compensates.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-07

Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 1.75 Down 1.770