Singapore Post Ltd - CIMB Research 2017-02-10: Decent ops marred by unfortunate circumstances

SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - Decent ops marred by unfortunate circumstances

3QFY17 core net profit of S$31.4m missed expectations due to a poor showing in the US; 9MFY17 core net profit formed 65%/67% of our/consensus FY17 forecasts.
TradeGlobal recorded a net loss despite seasonally strong volumes due to the loss of two key customers and higher costs; it faces the risk of impairment in 4QFY17.
Back in Asia Pacific, the postal and logistics segments saw higher operating profit qoq on larger AliExpress volumes and increased utilisation at its warehouse.

Maintain Add. We expect an earnings turnaround in FY18 with the re-opening of the SPC retail mall. We would look to buy on price dips following the weak set of results.

3QFY3/17 core net profit of S$31.4m (+16% qoq, -29% yoy) was a disappointment amid seasonally stronger volumes (Singles Day, Black Friday, Christmas).
Revenue fell slightly short of expectations on lower contributions from the ecommerce segment, especially at TradeGlobal (TG).
While operating profit at the postal/logistics segments performed in line/exceeded expectations, S$8.4m in operating losses at the ecommerce segment brought overall operating profit down to S$37.3m (-2% qoq, -32% yoy).

Postal revenue grew 13% qoq and 10% yoy, lifted by higher international mail revenue (+24% qoq, +11% yoy) as SPOST handled more AliExpress shipments, helped by the Singles Day sales event.
Postal operating margins rose slightly qoq to 26.9% (2QFY17: 26.2%) on better operating leverage, and operating profit rose 16% qoq to S$38.5m.
SPOST continues to engage in conversations with Cainiao, Lazada and Redmart on future collaboration, and plans to increase outbound mail in addition to trans-shipments.

We were pleasantly surprised by the improvement in logistics operating profit to S$8.8m, which grew 78% qoq. All businesses saw higher revenue, with overall logistics revenue up 11% qoq and 6% yoy.
While startup costs at the new ecommerce logistics hub continue to hurt margins and operating profit was still down 27% yoy, SPOST managed to improve utilisation from 10% to 18% at the facility, partially helped by the peak period.

TG was the key culprit for the group’s poor overall performance. It was expected to post positive profits but instead suffered losses due to:
1. high cost of seasonal fulfillment labour,
2. loss of a key client that filed for bankruptcy and
3. a client that insourced its freight operations.
As TG is performing below its base case, it could face impairment in 4Q, which we had highlighted in an earlier note in Jul 2016.
We expect cost pressures to ease following a restructuring of TG’s operations. Jagged Peak was profitable in 3Q.

We continue to like SPOST for its growth potential in ecommerce logistics following its JV with Alibaba. It also has the potential to divest non-core assets (e.g. self-storage, retail mall).
The stock trades at 21x forward P/E, an attractive level for earnings recovery in FY18 following the re-opening of the SPC retail mall in mid-2017.
Maintain Add, with a lower DCF-based target price of S$1.62 (7% WACC) as we cut FY17-19 EPS by 6-10% for lower ecommerce profits.
Key risk is fierce competition displacing SPOST’s volumes

Jessalynn CHEN CIMB Research | http://research.itradecimb.com/ 2017-02-10

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.62 Down 1.760