Singapore Post Ltd (SPOST SP) - Maybank Kim Eng 2017-05-15: Continued Drag From TradeGlobal & Declining Mail Business

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SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd (SPOST SP) - Continued drag from TradeGlobal & declining mail business

Weak core earnings; EPS lowered, TP cut 4% 

• FY17 core earnings fell 25% YoY, in line with our expectation, but below consensus at 97%/94% of our/consensus estimates. The earnings drag mainly came from: 
  1. major losses from Trade Global (no sign of improvement) of SGD27m for FY17 and SGD10m in 4Q17, similar to 3Q17; 
  2. depreciation costs of SGD9.2m from e-commerce logistics hub; and 
  3. a decline in postal operating profit of SGD6.6m. 
• Also, an impairment charge of SGD209m was recognised, of which SGD185m came from TradeGlobal due to its poor performance. 
• We cut our FY18-19E EPS by 2% for softer revenue growth due to declining mail business. Our DCF-based TP is reduced by 4% to SGD1.29 (WACC 7.6%; LTG 1%). 
• Maintain HOLD due to lack of catalysts, pending the following: 
  1. clearer direction upon the arrival of new CEO; 
  2. better progress on dealing with TradeGlobal’s issues; and 
  3. ramp up of new e-commerce logistics hub.

TradeGlobal continues to be the major drag 

• TradeGlobal has not shown any improvement, as it continued to report significant operating losses in 4Q17. The business will face structural challenges from: 
  1. disruption in the US fashion retail industry; 
  2. loss of two key customers which account for 30-40% of revenue; and 
  3. cost pressure from labour shortages in the Cincinnati area. 
• Turnaround plans include: 
  1. renegotiating better pricing and terms with existing customers; 
  2. searching for new, but selectively higher quality clients. 
• Also, an independent committee including legal counsel has been formed to review the prior process for the acquisition of TradeGlobal.

Negative on mail but mild positive on logistics 

• Earnings continue to decline for the largest contributor, the mail segment, which continues to underperform due to the structural decline in traditional mail that the growing international e-commerce mail business could not offset. This weakness is expected to continue for a while. 
• On the bright side, the new regional e-commerce logistics hub is gaining traction. Several new customers will be coming on board and the warehouse capacity has reached 45%, while the parcel sorting capacity remains at around 20%.

Swing Factors

Upside

• Faster than expected turnaround of TradeGlobal, a newly acquired e-commerce enabler for fashion and lifestyle.
• Higher than expected revenue growth in e-commerce logistics, from more customers and services.
• Higher than expected margins for e-commerce logistics, from economies of scale and operating leverage.

Downside

• Inability to resolve corporate-governance conundrum, including independence of the Board and inadequate disclosure.
• Failure to extract synergies and integrate its largest acquisition, TradeGlobal.
• Worse-than-expected deterioration in mail business before e-commerce logistics compensates.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-05-15

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.29 Down 1.340