SINGAPORE POST LIMITED
S08.SI
Singapore Post (SPOST SP) - 1HFY17 Underperforms On Elevated Transformation Costs, Downgrade To HOLD
- SPOST’s 1HFY17 net profit (underlying net profit -19% yoy) was below our and market expectations on elevated transformation costs.
- While we are optimistic on its long-term prospects, the recent outperformance since our upgrade appears to have discounted recent positives, including Alibaba’s recent investments.
- We trim our FY17-19 net profit forecasts by up to 4% to factor in higher costs and downgrade SPOST to HOLD with a revised SOTP target price of S$1.76. Entry price S$1.55.
RESULTS
1HFY17 results fell below our estimates on cost pressure.
- Singapore Post (SPOST) reported a 1HFY17 underlying net profit of S$62.8m (-19.3% yoy), which represents 40% of our full-year estimate. 1HFY17 earnings were impacted by:
- higher cost in the e-commerce business,
- costs related to the new Regional eCommerce Logistics Hub,
- loss of rental income from SPC mall redevelopment, and
- a change in business mix with lower domestic letter mail volumes compared with international mail volumes.
- An interim dividend of 1.0 S cent/share was declared (vs 1.5 S cents in 1HFY16) implying a payout of 80%.
Top-line figures supported by e-commerce.
- 1HFY17 revenue increased 22.3% yoy, bolstered by increased growth in cross-border e-commerce related activities and inclusion of new US acquisitions - Trade Global and Jagged Peak.
- E-commerce related revenue has been advancing at a rapid clip, where it made up nearly 49% of the group revenue as of 1HFY17, up from 29% in the corresponding period last year.
STOCK IMPACT
Continued margin pressure until operating leverage kicks in.
- 1HFY17 total expense growth of 28.5% yoy exceeded top-line growth, driven by consolidation of acquisitions and change in business mix. Specifically, 1HFY17 volume related expenses increased 44.2% yoy to S$322.84m, representing nearly half of group revenue. This increase, as we understand, reflects the growth in international mail volume as well as increased e-commerce logistics volume as part of SPOST’s transformation.
- We anticipate operating leverage would kick in by FY18 on higher volumes across the e-commerce logistic network and increased operational efficiency.
Update on dividend review.
- The board has revised its dividend policy, changing it from an absolute amount to being based on a payout ratio ranging from 60-80% of underlying net profit for each financial year.
- In our estimates, we adopt a dividend payout estimate of 70%, which would mean an annual dividend of 4.7-6 S cents, based on FY17-19F EPS.
Logistics space getting more competitive.
- In 2QFY17, operating profit for the logistics segment declined 1.7ppt on the back of lower revenue amid a global economic downturn as well as costs incurred in relation to the Regional eCommerce Logistics Hub.
- We saw increased competition in the logistics space, where Famous’ revenue was impacted (-8% yoy) by depressed freight rates and lower volumes while Quantium Solutions (-5% yoy) faced heightened pricing pressures in the e-commerce logistics space. Nevertheless, we are hoping that collaboration with Alibaba will muscle SPOST e-commerce logistics capabilities in the region and strengthen its network.
- We continue to project a 3-year revenue CAGR of 15% for the logistics segment.
Opening of the eCommerce logistics hub.
- The Regional eCommerce Logistics Hub recently opened on 1 Nov 16, with a logistic sorting hub on the ground floor, 2 floors of warehousing as well as an office block.
- We understand that it is currently running at about a 10% utilisation rate and we expect utilisation to ramp up towards FY18F as SPOST expands its clientele.
EARNINGS REVISION/RISK
Adjust earnings estimates downwards by up to 4% for FY17-19.
- In our revision, we have modelled higher e-commerce revenue growth, with a revised 3-year CAGR of 25% vs our previous assumption of 14%. However, the increase in top-line was offset by our revised estimate for higher volume-related expenses to 48% of group revenue for FY17-19F, from 44% previously.
- Based on our new estimates, we have a projected a 3-year net profit CAGR of 8.3%.
VALUATION/RECOMMENDATION
Downgrade to HOLD with a lower SOTP target price of S$1.76.
- We downgrade SPOST to HOLD from BUY after its share price increased by 12% since our last upgrade in October.
- While we remain positive on SPOST’s long term prospects, the recent outperformance appears to have discounted recent positives, including Alibaba’s recent investments. With limited upside of 7% to our target price of S$1.76, we downgrade to HOLD. Entry price: S$1.55.
SHARE PRICE CATALYST
- Appointment of new CEO.
- Better-than-expected earnings from TradeGlobal.
- Higher-than-expected growth in the e-commerce and logistics businesses.
Thai Wei Ying
UOB Kay Hian
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Andrew Chow CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2016-11-07
UOB Kay Hian
SGX Stock
Analyst Report
1.76
Down
1.770
