Singapore Post Ltd - CIMB Research 2016-12-05: Look for earnings relief in FY18F

Singapore Post Ltd - CIMB Research 2016-12-05: Look for earnings relief in FY18F SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - Look for earnings relief in FY18F

  • We think the market has yet to price in anticipated earnings recovery in FY18F, with the reopening of the SPC retail mall and volume growth from Alibaba and Lazada.
  • Investments using proceeds from the two Alibaba deals could be used to drive earnings by partnering and taking stakes in profitable last mile players.
  • Maintain Add, with a DCF-based target price of S$1.76 (7% WACC).

3QFY17F could see better earnings due to operational leverage

  • In the US, Nov-Dec typically accounts for 40% of annual sales volumes, as the period spans Black Friday, Cyber Monday and Christmas. While the e-commerce segment has been generating operating losses, we think 3QFY17F will see losses narrowing as the business gains operating leverage with larger sales volume.
  • The international mail segment should also see better performance from the handling of high volume of items shipped during Alibaba’s Singles Day event.

Opening of SPC retail mall could provide boost to FY18F earnings

  • The SPC retail mall is slated for reopening in mid-2017, with anchor tenants NTUC FairPrice, Kopitiam and GV already secured. Conservatively, we expect the mall to provide a c.5% boost to bottomline in FY18F.
  • SPOST remains on the lookout for potential partners to drive better tenant mix and occupancy at the retail mall, as well as to deliver its O-squared retail concept (online-to-offline and offline-to-online). 
  • SPOST is also exploring the option of divesting part of its stake in the mall to better monetise its assets.

Investments and partnerships could drive earnings 

  • SPOST intends to expand and enhance its e-commerce logistics capabilities in ASEAN, Australia and New Zealand. The S$86.2m proceeds from the sale of its 34% stake in Quantium Solutions will be invested to strengthen Quantium’s existing network.
  • Another S$137.7m (75% of net proceeds from the new share issuance to Alibaba) will be available for investments. We think SPOST could deploy this in partnerships with other logistics providers (such as its arrangement with GDEx and 4px), which could drive earnings from associates contributions.

Bear with near-term drag from investments 

  • Like any early- to mid-stage startup, SPOST is running at suboptimal returns as it continues to invest in its infrastructure to compete for market share.
  • In the near term, startup costs at SPOST’s newly-opened E-commerce Logistics Hub (ECLH) and front-end investments in the US through SP Commerce (the entity that integrates TradeGlobal and Jagged Peak) could continue to be drags on returns.

Maintain Add

  • We maintain Add, with a DCF-based target price of S$1.76 (7% WACC).
  • The S$182m ECLH solidifies SPOST’s position as a leading e-commerce logistics provider and its 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 and Lazada should also help increase volumes quickly.

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.760 Same 1.760