Singapore Post Ltd - CIMB Research 2017-08-04: With Every New CEO, Comes A Strategic Review

Singapore Post Ltd - CIMB Research 2017-08-04: With Every New CEO, Comes A Strategic Review SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - With Every New CEO, Comes A Strategic Review

  • Singapore Post's 1QFY3/18 core net profit of S$27m (-25% yoy) missed expectations at 22% of our and Bloomberg consensus full-year forecasts.
  • Postal and logistics revenues expanded; postal faces margin pressure while logistics could see OPM trend upwards with improving utilization at the regional ECLH.
  • Ecommerce still loss-making, though new JP customers and ongoing TG turnaround helped narrow losses from 4QFY17’s S$15.1m to 1QFY18’s S$4.2m.
  • Strategic review could help SPOST integrate operations and refocus its positioning.
  • Maintain Hold as we await greater clarity on the outcome of the review.

1QFY18 core operating profit slid 23.2% yoy, deemed a miss 

  • SPOST reported 1QFY18 net profit of S$31m (-13.6% yoy), as higher operating expenses (volume-related +15%, labour +5%, admin -2%, depreciation +35%) offset the slight topline growth of 6.2%, mainly led by the postal and logistics segments. 
  • Excluding exceptional items of S$4m, mainly from fair value gain on warrants from GD Express, 1QFY18 core net profit was a miss against our and Bloomberg consensus expectations.
  • We also saw negative contribution from associates (4PX) on the back of expansion costs.

Postal: we think terminal dues could be negative near term 

  • 1QFY18 postal revenue rose 9.3% yoy, as higher ecommerce deliveries from the Alibaba Group drove 28.5% yoy growth in international mail, offsetting a 8.8% structural decline in domestic mail. Operating profit fell 13.7% yoy (1QFY18 OPM: 24.2%, 1QFY17: 30.7%).
  • While not surprised by the persistent weakness in domestic mail, we are concerned with the changes in Universal Postal Union's (UPU) terminal dues (wef 1 Jan 2018), which could weigh on postal margins.

QSI struggling; better utilization at ecommerce logistics hub (ECLH) 

  • All logistics subsidiaries saw sales growth in 1QFY18, except Quantium Solutions (QSI) whose sales dropped 16.2% yoy due to pricing and competitive pressure in its North Asia operations. 
  • The bright spot was higher utilization at the regional ECLH, from 4QFY17’s 45% to 1QFY18’s 65%, partly due to relocation of Lazada’s warehouse operations. 
  • We see potential for improving logistics OPM (1QFY18: 2.6%, 4QFY17: 1.6%, 1QFY17: 4.6%), in the absence of one-off startup costs and continual ramp-up of ECLH.

Narrowing ecommerce losses 

  • SPOST’s ecommerce segment continues to be loss-making, recording S$4.2m loss vs. S$3.5m in 1QFY17. 
  • While TradeGlobal (TG) lost two major customers previously in 3QFY17 (30-40% sales), Jagged Peak (JP) made gains in its customer base and processed volumes, hence 1QFY18 revenue dipped a marginal 0.9% yoy. 
  • Efforts to turn TG around seem to be bearing fruit, as losses narrowed qoq from 4QFY17’s S$15.1m (excluding impairment), amidst ongoing disruptions in the US fashion retail industry.

To embark on a strategic review 

  • With the new CEO Mr Paul Coutts on board since Jun 2017, SPOST recently announced a strategic review. We think key priorities are:
    1. enhancing postal competitiveness,
    2. reviewing unprofitable investments (TG, QSI), and
    3. assessing the impact of Amazon.

Maintain Hold; not yet time for this long-term ecommerce play 

  • As we adjust for higher operating expenses and continuing losses from both associates and minority interests, our FY18-20F EPS fall 3.7-8.6%, lowering our DCF-based target price to S$1.35 (7% WACC). Maintain Hold. 
  • We expect a stronger 2HFY3/18, as its 3Q is seasonally stronger with the holiday shopping, plus progressive rental income from the SPC retail mail (opening in Oct 2017). 
  • SPOST declared 1QFY18 interim DPS of 0.5Scts (1QFY17: 1.5Scts), following a switch of dividend policy to 60-80% payout ratio.

NGOH Yi Sin CIMB Research | 2017-08-04
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.35 Down 1.420