Singapore Post Ltd - CGS-CIMB 2018-05-11: Awaiting Delivery

Singapore Post Ltd - CGS-CIMB 2018-05-11: Awaiting Delivery SINGAPORE POST LIMITED SGX: S08

Singapore Post Ltd - Awaiting Delivery

  • Singapore Post’s FY18 headline PATMI of S$126m (+278% y-o-y) was above our/consensus expectations, thanks to fair value gains. Maintain ADD on potential earnings recovery.
  • Lower postal margin and associates’ earnings uncertainty are the new norms.
  • We expect new and existing initiatives to alleviate pressure facing each of the three segments, which should drive both volume growth and margin improvement.

FY18 reported net profit +278% y-o-y

  • Singapore Post (SPOST)’s 4QFY18 headline PATMI of S$24m marked a strong rebound from 4Q17’s S$65m loss. Excluding exceptional items (mainly fair value gains), its 4Q18 underlying net profit of S$15.3m (-29% y-o-y) would have been a miss against our/consensus expectations, due to weaker international mail margins and associates’ losses. 
  • FY18 core profit was 91% of our full-year forecast.

Bright spots in this mixed set of results

  • Key positives this quarter were the absence of impairment, slower decline of domestic mail (-2.7% y-o-y vs. 9MFY18: -7.8%), improving ecommerce losses and logistics performance (operating profit +109% y-o-y). 
  • Committed occupancy at the SingPost centre retail mall crept up from 85.9% to 95.6% in 4QFY18, which will make full-year rental contribution in FY19F. 
  • The group also declared final DPS of 2Scts, bringing full-year DPS to 3.5Scts (76% payout).

Embracing the new norms

  • We see the following as new norms for SPOST:
    1. the recurrence of professional fees (S$1m-2m p.a.) for consultancy services to drive cost leadership;
    2. lower postal OPM as the less profitable international mail outpaces domestic mail growth and comes under further pressure from terminal dues;
    3. volatile contribution from associates (esp. 4PX) due to continual investments for growth and
    4. disruption from new and existing competitors across all areas, such as Blu Ports, Park N Parcel and Ninja Van.

Additional measures to mitigate postal margin pressure

  • Changes in terminal dues took a toll on SPOST’s postal OPM (4Q18: 20.5%, 9M18: 24.0%) even as its international mail volume growth stayed resilient at over 30% y-o-y. With ongoing measures like the implementation of higher postal rates across all of its customers, enhanced bilateral cooperation with other countries and negotiation of line haul costs, we expect some margin relief in the coming quarters. 
  • Improvements in existing products and solutions like POPStations could also be in the pipeline.

Quantium Solutions Hong Kong (QSI HK) spared from impairment and remains relevant

  • Quantium Solutions Hong Kong (QSI HK) remains an important transshipment route for SPOST, given its strategic role as a gateway to China, despite persistent competition in North Asia. 
  • Apart from intensifying collaboration with Alibaba, management has since reviewed its key customer contracts, repositioned with Jagged Peak (JP) interface and is working on new products and customers. 
  • Higher utilisation of the regional ecommerce logistics hub and exit of loss-making contracts also meant impairment was not necessary.

Maintain ADD; stronger net cash position is a plus

  • We cut our FY19-20F EPS by 0.3-7.7% as we assume higher volume-related and admin costs, as well as lower associates’ earnings. We also introduce our FY21F forecasts. With lower capex requirements and as we roll forward to end-FY19F, our DCF-based Target Price inches up to S$1.59 (7% WACC, 1.2% LTG). 
  • Maintain ADD as the stock is poised for an earnings recovery over FY19-21F and offers 2-3% dividend yield. 
  • Faster-than-expected turnaround could catalyse the stock; poor overseas execution is a key risk.

NGOH Yi Sin CGS-CIMB | https://research.itradecimb.com/ 2018-05-11
SGX Stock Analyst Report ADD Maintain ADD 1.59 Up 1.580