Singapore Post (SPOST SP) - UOB Kay Hian 2016-11-07: 1HFY17 Underperforms On Elevated Transformation Costs, Downgrade To HOLD

Singapore Post (SPOST SP) - UOB Kay Hian 2016-11-07: 1HFY17 Underperforms On Elevated Transformation Costs, Downgrade To HOLD 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.


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: 
    1. higher cost in the e-commerce business, 
    2. costs related to the new Regional eCommerce Logistics Hub, 
    3. loss of rental income from SPC mall redevelopment, and 
    4. 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.


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.


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%.


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.


  • 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 | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-07
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 1.76 Down 1.770