Singapore Post - DBS Research 2017-11-16: Logistics Under Pressure

Singapore Post - DBS Vickers 2017-11-16: Logistics Under Pressure SINGAPORE POST LIMITED S08.SI

Singapore Post - Logistics Under Pressure

  • One-off doubtful debt provisions hit 2Q18 NPAT.
  • Strong international mail volumes growth of 45% y-oy; expect more growth coming through for Singles’ Day.
  • Logistics segment faces pressure in Hong Kong amidst narrowing eCommerce losses.
  • Maintain HOLD, TP of S$1.23.

Postal segment still a key concern. 

  • Postal, which accounts for > 40% of Singapore Post (SPOST)’s overall revenue and most of its operating profit, is still a key concern. Besides changes to terminal dues, which we think may pose downside risk to our projections, international mail which has seen high volume growth from the Alibaba Group, has not been able to offset the decline in operating profit from domestic mail which enjoyed higher margins. 
  • We believe that logistics should benefit from improving utilisation at eCommerce Logistics Hub while facing pressure in its overseas business and are encouraged by eCommerce’s narrowing losses. However, SingPost is not cheap at 23x FY18F PE.

Where we differ: 

  • We believe the market is currently pricing in better recovery for both the logistics and eCommerce segments (compared to our estimates). We model operating profit for these segments to recover to ~S$25m by FY19F. While a turnaround plan is in place for TradeGlobal, we are of the view that a full recovery (operating breakeven) is likely to only kick in come FY19F. 
  • Stiff competition in the logistics segment is also likely to put pressure on logistics’ margins. 
  • Our earnings are slightly above consensus, having input SPC mall’s contributions as well as 1H18 one-off gains.

Potential catalyst: 

  • In the near term, any turnaround at SPOST’s eCommerce and logistics segments would be a major catalyst for its share price. In the medium term, we believe potential divestment of SPC mall could be a catalyst.


  • We use discounted cash flow valuation (WACC 6%, terminal growth rate 2%) to derive our TP of S$1.23. The stock offers a yield of ~2.7%. 
  • We maintain our HOLD rating for the stock.

Key Risks to Our View

  • Further escalation of e-commerce losses. The eCommerce segment is facing losses following the acquisitions of Jagged Peak and TradeGlobal. A further escalation in losses at these businesses could depress SPOST's bottom line in the medium term.


  • Narrowing eCommerce losses a bright spot amidst challenging logistics environment Highlights 

One-off provisions hit 2Q18 net profit. 

  • While SingPost's headline revenues grew 10.2% y-o-y to S$354.7m (+0.2% q-o-q), underlying net profit was largely flat at S$27.6m (2Q17: S$27.1.m). NPAT was down 9.5% y-o-y to S$28.5m (-8.1% q-o-q) due to
    1. S$5.2m doubtful debt provisions for Logistics segment,
    2. absence of one-off gain of S$4.4m in relation to dilution of interest in an associated company last year. 
  • Postal segment operating profit largely stabilised q-o-q, while eCommerce segment continued to see narrowing losses as turnaround plan is in place, offset by challenges in the logistics segment.

Postal segment revenue registered strong growth amidst declining margins. 

  • Revenue grew strongly to S$148.3m (+17% y-o-y, -1% q-o-q) as international mail volumes continued to grow (particularly driven by higher volumes from the Alibaba Group) while domestic mail revenue continued to decline on the back of e-substitution. Operating margins continued to decline from 24.2% in 1Q18 to 23.7% in 2Q18, marking the sixth consecutive quarter of decline. 
  • Overall, operating profit was marginally down 3.3% from 1Q18, at S$35.1m (+5% y-o-y) on the back of higher revenues offset by lower margins. We are encouraged by this quarter’s strong growth in international mail volumes, and look forward to higher volumes in 3Q18 on the back of Singles’ Day volumes from Alibaba.

Continued narrowing eCommerce losses encouraging.

  • eCommerce segment posted operating losses of S$2.9m, down from losses of S$4.2m in 1Q18 and losses of S$15.1m in 4Q17 which included one-off write-offs due to TradeGlobal’s customers’ bankruptcy. 
  • On y-o-y basis, operating losses also narrowed significantly from S$6.8m of losses. Revenue came in at S$63.5m (-0.8% y-o-y), which shows that new customers and higher volumes at Jagged Peak have largely replaced TradeGlobal’s loss of revenue from two large customers. 
  • We think it is encouraging that losses are narrowing, reflecting that eCommerce turnaround plans are in effect and effective. SPOST is replicating technologies from JaggedPeak to TradeGlobal and rapidly automating TradeGlobal’s processes to prepare for the peak season in the upcoming six weeks.

Logistics segment saw losses; intense competition continues.

  • Logistics segment saw losses of S$5.2m due to provisioning for a key customer of Quantium Solutions Hong Kong. Excluding the provisions, Logistics’ operating profit would have been S$1m due to competitive pressures at its Hong Kong operations, reversing the improvement seen in 1Q17 (S$4.4m) from 4Q16’s low of S$2.6m operating profit, on higher revenue from last-mile deliveries in Singapore and Australia and freight forwarding volumes (S$165.9m, +7.6% y-o-y, -0.2% q-o-q).
  • Operating profit of S$1.0m would have been one of the lowest recorded profits thus far. According to SPOST, S$1.0m operating profit includes ongoing costs from planned investments in the logistics network. 
  • We note that the eCommerce Logistics Hub has seen strong growth in utilisation since its commencement. Utilisation for the warehouse is currently at 79% and 20% for the automated sorting machine.

Singapore Post Centre (SPC) mall opens. 

  • SPC mall opened in October 2017 and currently has committed occupancy of 80.4%. We currently estimate the mall to generate ~S$17m per annum (at operating profit level).

Outlook and recommendation 

Conclusion of strategic review – a good start. 

  • SingPost has completed its strategic review, appending key themes:
    1. Establish market leadership in Singapore’s eCommerce logistics sector; particularly, SPOST is estimated to have ~20% market share in parcels locally, which is understood to be a fragmented industry,
    2. Deliver full value from overseas investments, including turnaround of TradeGlobal,
    3. Develop future growth engines include strengthening collaboration with Alibaba and its associated companies and building out eCommerce logistics capabilities in Southeast Asia,
    4. Optimise costs and operations, such as via centralising its procurement functions across the group. 
  • We believe that the group is set in the right direction, but will take time to deliver.

Logistics facing competition, particularly in Hong Kong.

  • Accordingly, there has been structural changes in the Hong Kong logistics market where SPOST is facing stiff price competition. We think this is likely to continue into the year and hence expect logistics margins to remain thin for the year.

Maintain HOLD, DCF-backed TP of S$1.23 (revised from S$1.26). 

  • We maintain our HOLD recommendation with TP of S$1.23, while tweaking our earnings forecasts by 2% for FY19F to reflect a lower-margin outlook, offset by higher revenues.
  • We believe the market is currently pricing in better recovery for both the logistics and eCommerce segments (compared to our estimates), and has yet to fully price in impending changes to terminal dues which will take effect from 1 January 2018 and may entail downside risks to forecasts.

Sachin MITTAL DBS Vickers | Singapore Research Team DBS Vickers | 2017-11-16
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.23 Down 1.260