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

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.

Results missed on poorer US operations 

  • 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).

Strong AliExpress volumes lifted international mail contributions 

  • 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.

Logistics saw strong qoq improvement 

  • 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.

TradeGlobal missed expectations; risk of impairment but not news 

  • 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.

Maintain Add 

  • 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