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.

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.

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.

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.

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.

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.

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 | http://research.itradecimb.com/ 2017-08-04

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.35 Down 1.420