Singapore Post Ltd - CIMB Research 2017-05-14: 4Q A Big Miss, But FY18 Will Be Better

Singapore Post Ltd - CIMB Research 2017-05-14: 4Q A Big Miss, But FY18 Will Be Better SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - 4Q A Big Miss, But FY18 Will Be Better

  • FY3/17 core net profit of S$116m was a big miss, at 89% of our estimate.
  • Both logistics and ecommerce segments severely underperformed. Only the postal segment held steady on higher international mail volumes (AliExpress).
  • A drastic S$208.6m of impairments were taken, of which S$185m came from TG.
  • DPS of 0.5 Scts was declared, bringing FY17 DPS to 3.5 Scts (66% payout ratio).
  • We slash our FY18-19F EPS by 13-18%, and our DCF-based target price falls to S$1.42 (7% WACC). Downgrade from Add to Hold on near-term challenges.

Big earnings miss; only postal segment held steady 

  • SPOST’s 4QFY17 core net profit of S$21.4m (-32% qoq, -33% yoy) grossly missed estimates. It was a poor showing all-around, with the logistics and ecommerce segments hit by tougher competition. 
  • Only the postal segment held relatively steady, with revenue +0.6% yoy as growth in international mail (+12% yoy), driven by AliExpress, offset lower domestic mail (-9% yoy) revenue. Postal operating profit was flattish (-0.4% yoy).

Logistics saw tough competition, but onboarding new customers 

  • Logistics operating profit was a big disappointment (-71% qoq, -78% yoy) after the strong improvement in 3Q. While utilisation at the ecommerce logistics hub improved to 40-45% (3Q: 18%) for both parcel sorting and order fulfillment, it was ultimately the strong competition in North Asia driving down cross-border rates that hurt profitability.
  • SPOST also saw delays in implementation of order fulfillment for some new major customers, but these new contracts will show up in revenue in the quarters ahead.

eCommerce losses doubled, though including some one-offs 

  • We expected ecommerce operating losses to narrow on attrition of seasonal labour after the peak season. Instead, it nearly doubled qoq to S$15m, partly from one-offs, amount undisclosed: 
    1. receivables write-off at TradeGlobal (TG) and 
    2. amortisation at Jagged Peak (JP). 
  • SPOST plans to improve productivity using warehouse automation, improved contract pricing terms and sharing client networks among JP/TG. TG has signed up 2-3 new clients, but will take time to make up for the loss of its key clients (30-40% of sales).

Drastic impairments taken, especially at TradeGlobal 

  • SPOST took a S$185m impairment charge at TG, which way exceeds the S$18m-91m range we estimated in an earlier note. This represents 78% of the purchase price (S$236m) and 85% of goodwill (S$176m) and customer relationships (S$43m). 
  • The impairments were based on new business forecasts by Paul Demirdjian, CEO of US entities. SPOST also took S$21m/S$9m impairments at Postea/Toh Guan building.

SPC retail mall to contribute in 2HFY18, slightly later than expected 

  • The SPC retail mall is set to open in 2H17, with an NLA of 175,000 sq ft. However, SPOST guided for rental income to be recognised only starting 2HFY18, later than our expectation of 2Q. 
  • We have factored in rental income of S$9m in FY18 and S$25m in FY19 from the retail mall, based on conservative assumptions of S$12 psf rent.

Downgrade from Add to Hold 

  • While this was a disappointing set of results that proved some challenges ahead for SPOST, its cash flow generation remains strong. We see an earnings turnaround in FY18 after two years of declining profits, helped by the opening of SPC retail mall in 2H.
  • But with 1H still challenging, we downgrade to Hold, with a DCF-based TP of S$1.42 (7% WACC) as we cut FY18-19F EPS by 13-18% on lower logistics and ecommerce revenue/profits. 
  • Upside/downside risks: narrowing/widening losses at TG.

Jessalynn CHEN CIMB Research | 2017-05-14
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.42 Down 1.620