Singapore Post Ltd - CIMB Research 2017-11-15: 2QFY18 Marred By Logistics Losses

Singapore Post Ltd - CIMB Research 2017-11-15: 2QFY18 Marred By Logistics Losses SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - 2QFY18 Marred By Logistics Losses

  • Singapore Post’s 2QFY3/18 earnings were a slight miss, which we attribute to unexpected logistics losses incurred by QSI (66% subsidiary).
  • Postal operating profit (OP) rose 5.3% yoy, led by higher volume of international mail.
  • Ecommerce losses reduced yoy and qoq to S$2.9m in 2QFY18 due to turnaround efforts; 3QFY18F will be key, in our view.
  • Ongoing strategic review outlines four key themes, of which we think stronger execution for investments and strengthening domestic presence are imperative.
  • Maintain Hold on SPOST with lower DCF-based target price of S$1.28 (7% WACC).

2QFY18 core net profit slightly below our/consensus expectations 

  • Singapore Post reported 2QFY18 core net profit of S$27.6m (+1.9% yoy), which we deem a slight miss at 23% of our/Bloomberg consensus full-year forecasts. This was due to the underperforming logistics segment, which sank into the red at OP level. This was mitigated by higher associates’ contribution from Vietnam’s Indo Trans Logistics (30%- owned by SPOST), improved profitability of postal division and lower ecommerce losses.

Postal: slight uptick in 2QFY18 OP, expect better 3QFY18F 

  • International mail continued its upward OP trend in 2QFY18 (+45.2% yoy), offsetting the structural weakness in domestic mail, resulting in a +5.3% yoy increase in postal operating profit. 
  • Alibaba recently announced a 39% yoy rise in gross merchandise volume (GMV) for Singles’ Day and we expect this to translate into robust cross-border ecommerce deliveries for SPOST (as a strategic partner of Alibaba) in 3QFY18F.

Logistics sunk into operating losses 

  • Quantium Solutions (QSI) in Hong Kong was the key culprit behind logistics’ 2QFY18 operating loss of S$4.2m, as it suffered intense pricing competition (for transshipment portion) and a S$5.2m doubtful debt provision for its key customer. 
  • We expect near-term pressure for QSI to persist, while the regional ecommerce logistics hub could see higher utilisation from a seasonally-strong 3Q (2QFY18: 79%). 
  • All other sub-segments (Couriers Please, SP Parcels, Famous) performed well, registering 10-17% yoy sales growth in 2Q.

Ecommerce turnaround underway, 3QFY18F will be the real test 

  • SingPost’s turnaround efforts in the ecommerce segment seem to be paying off, with 2QFY18 losses narrowing to S$2.9m (2Q17: -S$6.8m, 1Q18: -S$4.2m) after TradeGlobal lost two large customers. 
  • In our view, 3QFY18F will be the litmus test for SingPost, as it will need seasonal fulfilment labour to cope with higher volume. 
  • Jagged Peak recorded higher volume and added new customers, leading to 2QFY18 topline growth of 16% yoy.

Stronger execution, winning home ground are key for SPOST 

  • While SingPost has shared few details on its action plan and timeline for the ongoing strategic review announced in Aug 2017, we think stronger execution of its overseas investments and winning in its home market are the most imperative of the four key themes identified. 
  • As the dominant postal player in Singapore, SingPost sees growing ecommerce potential locally and has constantly invested in infrastructure like the Speedpost network, POPStations and the newly-opened General Post Office.

Maintain Hold with slightly lower target price of S$1.28 

  • We lower our FY18-20F EPS by 4.6-9.1%, as we assume higher international mail volume and stronger associates’ contribution but lower operating margins for both postal and logistics segments. Our DCF-based target price falls to S$1.28 but we maintain Hold.
  • Intensifying competition and unfavourable changes in terminal dues for international mail are downside risks, while earlier-than-expected turnaround of QSI/TG are potential catalysts. 
  • SingPost declared 2QFY18 interim DPS of 0.5Scts (2QFY17: 1.0Scts)

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2017-11-15
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.28 Down 1.350