Singapore Post (SPOST SP) - UOB Kay Hian 2018-02-05: 9MFY18 Turnaround In Sight; Upgrade To BUY

SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - 9MFY18 Turnaround In Sight; Upgrade To BUY

9MFY18 underlying profit of S$89.7m (-4.8% y-o-y) is in line with expectations. While SingPost is still in the transformation phase, we are encouraged by the turnaround in key segments for two consecutive quarters.
Going forward, we expect earnings to be driven by higher volumes in international mail, recovery in TradeGlobal and contribution from SPC retail mall.
Upgrade to BUY with a higher SOTP target price of S$1.60 (previously S$1.34).

Singapore Post’s (SPOST) 9MFY18 underlying profit declined 4.8% y-o-y to S$89.7m, in line with our estimate and at 77% of full-year forecast.
Earnings were marginally dragged as revenue growth (+9.5% y-o-y) was exceeded by the faster increase in operating expenses (+13.5% y-o-y).

Commendably, we note that 3QFY18 underlying profit rose 11.9% y-o-y, driven by improved performances in most segments, specifically postal, eCommerce and property.

With most of the development projects completed, we expect free cash flow to improve significantly. As an indication, for 9MFY18, free cash flow improved to S$93.6m (4 S cents/share) from a negative S$11.6m in 9MFY17.
Meanwhile, the group declared an interim dividend of S 0.5 cents during the quarter.

For the second consecutive quarter, postal showed improved performance with 3QFY18 postal operating profit rising 4% y-o-y on the back of strong international mail revenue growth offsetting the decline from domestic mail.
Notably, quarterly revenue for international mail crossed S$100m for the first time on higher cross-border e-commerce, including collaboration with Alibaba for Singles Day.

3QFY18 eCommerce operating loss narrowed significantly by 55.4% y-o-y to S$3.8m as TradeGlobal performed largely in line with the turnaround plan and delivered good cost control over the peak season in 3QFY18.
Furthermore, TradeGlobal managed to overcome the loss in revenue from two major customers, recording improvement in 3QFY18 revenue (+2.3% y-o-y). Meanwhile, Jagged Peak recorded a 43.9% y-o-y surge in revenue as volume surged over the US festive peak shopping season.

Rental and property-related income increased 52.9% y-o-y, driven by rental income from the SPC retail mall which opened in Oct 17. Committed occupancy as at Dec 17 was 85.9%, up from 80.4% in Sep 17.

In 3QFY18, logistics operating profit declined 45% y-o-y to S$4.9m. Performance was impacted by higher line haul and handling costs as well as lower contribution from Quantium Solutions, which continued to face competitive pressures in Hong Kong.
Nevertheless, eLog Hub is ramping up nicely, where warehousing utilisation improved to 87% in 3QFY18 (2QFY18: 79%, 1QFY18: 65%). Parcel sorting utilisation stood at 21%.

Upgrade to BUY with a higher SOTP target price of S$1.60 (previously S$1.34).
We roll valuation to FY19. Additionally, given the significant improvement in e-commerce, we now value the e-commerce business on 1.5x 2019F P/S (50% discount to peers’ from 90% discount previously). Upgrade to BUY on the potential turnaround.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-05

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