Singapore Post Ltd (SPOST SP) - Maybank Kim Eng 2018-02-05: Stronger Turnaround; Maintain Contrarian BUY

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SINGAPORE POST LIMITED S08.SI

Singapore Post Ltd (SPOST SP) - Stronger Turnaround; Maintain Contrarian BUY

All segments continued to deliver, except logistics 

• Maintain contrarian BUY and DCF-based Target Price of SGD1.50. Singapore Post's 3Q18 core PATMI was in line, with 9M18 equal to 81% and 82% of ours and consensus FY18E. 3Q18 core PATMI grew by a strong 37% y-o-y, due to growth in the postal segment, continued turnaround in the e-commerce segment and resumption of rental income from its redeveloped mall. 
• We expect the growth and turnaround trends to continue from three key drivers:
  1. cost efficiency gains;
  2. winning new customers; and
  3. increasing collaboration with existing clients. 
• Key risks are intensifying competition in the logistics segment and negative impact from terminal dues.

Postal segment op profit grew for the 2nd quarter 

• Postal, the largest contributing segment, recorded its second consecutive quarter of y-o-y operating profit growth in 3Q18, after declining for five consecutive quarters. This was driven by a strong 38% y-o-y growth in international mail revenue, from higher cross-border e-commerce deliveries in collaboration with Alibaba (BABA US, HOLD, Target Price USD185) for the Double Eleven event in Nov 2017. 
• This growth more than offset the continued decline in domestic mail revenue of 7% y-o-y.

Clearer turnaround in e-commerce, even for topline 

• The e-commerce segment continued to narrow its operating loss, also for the second consecutive quarter. 
• Aside from cost management, Trade Global has managed to record marginal growth in revenue for the first time since 3Q17, driven by new customers. This has helped to overcome the loss of revenue from two major customers in 4Q17. Also, Jagged Peak reported a robust revenue growth of 44% y-o-y. 
• We believe the turnaround will progress well as the new CEO for this segment, Paul Demirdjian, is implementing best practices from Jagged Peak for Trade Global.

Other drivers: rental and logistics improvement 

• Other earnings drivers are a resumption of rental income from the redeveloped SingPost Centre retail mall; operating profit from rentals increased 52% or SGD3.1m y-o-y and there should be more upside from a higher occupancy rate than the current 86%. 
• Also, potential improvement in the logistics segment could also drive a recovery but this is not expected in the next 2-3 quarters.

Results overview 

• SingPost’s 3Q18 results were in line with our expectation and the street. 9M18 core PATMI met 81% of our forecast and 82% of consensus. 3Q18 core PATMI reported a strong growth of 37%, mainly due to growth in the mail segment, continued turnaround in the e-commerce segment and resumption of rental income from the redeveloped SingPost Centre retail mall. 3Q was typically the seasonally strongest quarter, while 4Q will make up around 20% of full-year earnings.
• We continued to see positive turnaround and growth trends in 3Q18: 
  1. Operating profit for the mail segment continued to grow for the second consecutive quarter; international mail revenue growth was strong, up 38% YoY, and more than offset the decline in traditional mail (-7% y-o-y).
  2. Property income grew significantly thanks to the rental income from redeveloped SingPost Centre retail mall, which opened in Oct 2017. Operating profit for the property segment grew 52% y-o-y, from SGD6m in 3Q17 to SGD9m in 3Q18.
  3. Operating loss from the e-commerce segment continues to noticeably narrow, from SGD8m in 3Q17 to SGD4m in 3Q18.
  4. Associates and JV line continues to be positive, at SGD1m in 3Q18 vs a marginal loss in 3Q17.
  5. Even the logistics segment, which is facing intensifying competition in HK, turned into the black, with a SGD5m operating profit in 3Q18 vs SGD4.2m loss in 2Q18. However, on a y-o-y basis, this segment recorded a decline of 44%, as competition in the Hong Kong market persists, which is expected to continue for the next few quarters

Swing Factors

Upside

• Faster-than-expected turnaround of Trade Global, a newly acquired e-commerce enabler for fashion and lifestyle.
• Higher-than-expected revenue growth in e-commerce logistics, from more customers and services.
• Higher-than-expected margins for e-commerce logistics, from economies of scale and operating leverage.

Downside

• Inability to resolve corporate-governance conundrum, including independence of the board and inadequate disclosure.
• Failure to extract synergies and integrate its largest acquisition, Trade Global.
• Worse-than-expected deterioration in mail business before e-commerce logistics compensates.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-05

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