Singapore Post Ltd - CIMB Research 2018-02-05: 3QFY18 Recovery In Transit

Singapore Post Ltd - CIMB Research 2018-02-05: 3QFY18 Recovery In Transit SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd - 3QFY18 Recovery In Transit

  • SingPost's 9MFY3/18 core net profit fell 4.8% y-o-y but met our and Bloomberg consensus expectations, at 73% of our full-year forecast.
  • Upgrade from Hold to ADD with higher Target Price of S$1.58. We think it is poised for earnings growth in all three segments, plus rental income from newly-opened retail mall.
  • Strengthening Alibaba collaboration, and recent launch of international airmail rates could help ease concerns from terminal due changes.
  • Continual ramp-up of Regional e-commerce logistics hub, and initiatives to make QSI HK more competitive, could pave the way for logistics’ bottom-line recovery.
  • E-commerce turnaround on track after passing 3Q’s litmus test with stable losses.

3QFY18 core net profit +11.9% y-o-y 

  • SingPost reported 37.2% growth in 3QFY18 PATMI, thanks to higher earnings from postal segment, rental income and narrowing e-commerce losses. Stripping out one-off items (include S$6.9m deferred tax adjustment due to US tax rate change), 3QFY18 core net profit still improved 11.9% y-o-y, in line with our and Bloomberg consensus full-year forecasts. 
  • E-commerce-related revenue formed 60% of 3Q18 topline (+26.4% y-o-y) while committed occupancy at SingPost Centre retail mall rose to 85.9% (2QFY18: 80.4%).

Turnaround in sight for all segments 

Impact of terminal dues could be manageable Multiple hikes in terminal dues since 2010. 

  • SingPost faced increasing international settlement rates since the beginning of 2010, when Singapore was re-classified as “New Target Country” by the Universal Postal Union (UPU) as part of the changes in the terminal dues system. SingPost subsequently raised its postage rates for both domestic and international mail in Oct 2014 (1HFY15) to cope with cost increases, which led to a slower decline of postal operating margin (OPM) in the years after. 
  • Similarly, with effect from 1 Jan 2018, UPU implemented a new e-commerce package rate for postal, which could potentially level the playing field among countries in various categories. To cope with such changes and enable cost pass-through, SingPost recently introduced new international airmail rates for small packets. 
  • We note that the changes in terminal dues are not unique to SingPost, and will affect postal companies globally.

Awaiting clearer visibility in 4QFY18F, but we think impact should not be drastic. 

  • If history is of any guidance, any increment in terminal dues typically has a lagged impact on the postal OPM, but unlikely to hurt topline.
  • Apart from SingPost raising rates for international delivery to defray higher costs, we think the rising adoption of ecommerce in the region (means a growing revenue pie), coupled with greater collaboration intensity with strategic partners like Alibaba, Lazada etc, will continue to drive cross-border ecommerce deliveries for SingPost. Areas where there is potential for deeper partnerships include:
    1. broader coverage of transshipment routes, and
    2. greater involvement in other aspects of the ecommerce logistics value chain. 
  • Alibaba-owned Taobao and Cainiao networks are currently among the few dominant players in their fields – Cainiao handled about 70% of total parcels in 2016 with a daily volume of 57m, while Taobao was China’s biggest online mall operator based on 2016 gross merchandise value (GMV).

Higher international mail growth to offset domestic mail’s structural decline over FY18-20F. 

  • Our sensitivity analysis on the potential impact of terminal dues on SingPost’s postal segment suggests that for every 1% decline in the OPM of the postal segment, its revenue has to grow c.4% to maintain its operating profit level. In other words, operating profit will be lowered by c.4% for every 1% decrease in OPM, assuming revenue forecasts are unchanged. 
  • We forecast domestic mail revenue to fall 5-8% p.a. over FY18-20F on the back of continued migration towards electronic statements and bills, while international mail grow 15-37% p.a. over the same period.

Logistics: profitability returns amidst North Asia headwinds 

  • Logistics segment posted operating profit of S$4.9m in 3QFY18, reversing from its 2QFY18’s loss of S$4.2m upon doubtful debt provision for a key customer of QSI HK. While QSI HK continued to face rising competition, all other subsidiaries (SP Parcels, Couriers Please, Famous Holdings) saw increased last-mile delivery and freight forwarding volumes. Mitigating measures mentioned by management at the recent results briefing include:
    1. further optimisation of process,
    2. development of new products and revenue streams, and
    3. reviewing of existing customer contracts. 
  • Meanwhile, improving utilisation at the regional e-commerce logistics hub (ECLH) for at both warehouse (3Q18: 87%, 2Q18: 79%) and parcel sorting machine (3Q18: 21%, 2Q18: 20%) should also help lift the logistics’ OP margin in the medium term, in our view.

The worst possibly over for e-commerce 

  • 3QFY18 was a litmus test for SingPost’s e-commerce division, as both Jagged Peak (JP) and TradeGlobal (TG) exercised good cost controls during the US peak shopping season with operating loss stable at S$3.8m vs. 2QFY18’s S$2.9m loss. 
  • Recall that this segment recorded S$8.4m operating loss in 3QFY17 after TG lost two key customers and suffered from high cost of seasonal fulfilment labour. We expect narrowing losses in the coming quarters as management executes on its business turnaround plans.


Upgrade from Hold to ADD, with higher Target Price 

  • As we raise our assumptions for property income and international mail growth, our FY18-20F EPS rise 0.4-4.6%, resulting in a higher DCF-based target price of S$1.58 (7% WACC). We upgrade our rating from Hold to ADD as we think the downsides are mostly in the price and SingPost could re-rate on the back of stronger earnings delivery in FY19F. 
  • The stock also offers 2.7-3.3% forecasted dividend yield for FY18-20F.
  • Property profit increased from 3QFY17’s S$5.9m to S$9.0m in 3QFY18, largely due to rental income from the SingPost Centre retail mall (reopened in Oct 2017), which saw its committed occupancy improve from 80.4% (as at 2QFY18) to 85.9% (as at 3QFY18).

NGOH Yi Sin CIMB Research | 2018-02-05
CIMB Research SGX Stock Analyst Report ADD Upgrade HOLD 1.58 Up 1.280