Singapore Post (SPOST SP) - UOB Kay Hian 2018-03-16: Limited Price Downside; Geared To Rising E-commerce Volume

Singapore Post (SPOST SP) - UOB Kay Hian 2018-03-16: Limited Price Downside; Geared To Rising E-commerce Volume SINGAPORE POST LIMITED S08.SI

Singapore Post (SPOST SP) - Limited Price Downside; Geared To Rising E-commerce Volume

  • We see limited downside to SPOST’s share price due to share buybacks and improving prospects. 
  • Free cash flow yield should improve from FY19 and the group will benefit from rising e-commerce cross-border volume as well as improvements across key business segments. 
  • Maintain BUY and target price of S$1.60.



WHAT’S NEW


Laggard despite improving prospects. 

  • Singapore Post’s (SPOST) share price has been a laggard, rising only 2.6% over the past year and underperforming the FSSTI’s rise of 12.1%. 
  • Reiterate BUY and we believe share price could play catch-up on the improving outlook and strong free cash flows from FY19.


STOCK IMPACT



Share buybacks indicate value and at below Alibaba’s entry price. 

  • SPOST has been steadily doing share buybacks since the start of the year. To-date, it has acquired 2.6m shares, or 1.1% of its share capital, at S$1.24-1.41/share. 
  • At the last closing, investors would be buying into SPOST at below Alibaba’s average cost of S$1.52/share (bought over two tranches at S$1.42-1.74/share) for its 14.5% stake in SPOST.

Turnaround in key segments in 3QFY18. 

  • The 9MFY18 results already indicated improvement in key segments such as postal and its e-commerce. In addition, 3QFY18 also saw the resumption in contribution from its newly revamped SingPost Centre retail mall. 
  • Occupancy as at Dec 17 was 86% and we understand more tenants have signed up since then. Hence, we believe contributions from investment properties should continue its upward trajectory.

Past capex-intensive period, solid free cash flows ahead. 

  • Going forward, we expect SPOST’s free cash flow yield to rise to 6-7% in FY19-20 as capex has peaked, in our view. Over the past five years, the group has spent over S$1,138m in capital expenditure and investments but we estimate future maintenance capex is only estimated at S$60m-70m per year.

International mail delivered solid growth, underpinned by Alibaba. 

  • For the second consecutive quarter, postal showed improved performance with operating profit growing 4% y-o-y in 3QFY18 on the back of strong international mail revenue growth offsetting the decline from domestic mail. Of interest is that 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. 
  • Looking ahead, we see potential for more strategic collaboration, given Alibaba’s ambitious growth plans.

E-commerce: Moving in the right direction. 

  • Progress is being made, with some nascent improvements noted in its 3QFY18 results. 
  • Operating losses narrowed further to S$3.8m in 3QFY18 from S$8.4m in 3QFY17. The CEO for this segment has been implementing some of the best practices from Jagged Peak to Trade Global. These include the streamlining of management and automation to help address high labor costs, particularly during peak periods.

Logistics: Gradual progress at eLog hub but Hong Kong still challenging. 

  • The eLog Hub is ramping up nicely, where warehousing utilisation improved to 87% in 3QFY18 (2QFY18: 79%, 1QFY18: 65%). However, parcel sorting utilisation is relatively low at 21% and we understand a team is looking at how to improve this. 
  • Quantium Solutions continued to face competitive pressures in Hong Kong, which has been severely impacted since mid-17 due to new entrants that have been discounting prices.
  • Management plans to focus on end-to-end solutions that include packing and sorting to avoid direct competition with these new well-funded competitors.


EARNINGS REVISION/RISK

  • We maintain our earnings estimates and conservatively project a 3-year adjusted net profit CAGR of 9.5%.


VALUATION/RECOMMENDATION

  • Maintain BUY and SOTP-based target price of S$1.60; opportunity to accumulate.
  • We remain sanguine on SPOST’s outlook as key divisions register better performances and free cash flow is expected to improve, with an estimated free cash flow yield of 6- 7%. This should help sustain decent dividend yields of 2.5% in FY18 and 2.9% in FY19.


SHARE PRICE CATALYST

  • Better-than-expected recovery in TradeGlobal.
  • Turnaround at Quantium Soluitons and easing competition in Hong Kong.
  • Higher-than-expected ramp-up at eCommerce logistic hub.







Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.60 Same 1.60



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