Singapore Post (SPOST) - UOB Kay Hian 2018-05-14: FY18 Core Profit Below Expectations But Look Forward To FY19

Singapore Post (SPOST) - UOB Kay Hian 2018-05-14: Fy18 Core Profit Below Expectations But Look Forward To Fy19 SINGAPORE POST LIMITED SGX: S08

Singapore Post (SPOST) - FY18 Core Profit Below Expectations But Look Forward To FY19

  • FY18 underlying profit of S$105m (-9.2% y-o-y) came in below our and market expectations.
  • Singapore Post (SPOST) is still undergoing transformation and will need time to deliver but we are encouraged by the select turnaround in key segments.
  • We trim our FY19- 20 net profit forecasts by 1-3% but maintain BUY with a SOTP-based target price of S$1.59 (previously S$1.60).



RESULTS

  • Singapore Post’s (SPOST) FY18 underlying profit of S$105m declined 9% y-o-y and missed our estimate by 10%. This was due to weakness from its logistics as well as mail segments and due to some professional fees incurred for its transformation initiative. Overall group revenue was in line and a positive was its strong free cash flow of S$136m in FY18 vs only S$0.3m in FY17 owing to a lower capex of S$62m in FY18 compared with S$200m in FY17.
  • Logistics operations (Quantium Solutions) in Hong Kong continued to hamper earnings due to competitors as well as doubtful debts under a key customer. On a more positive note, e-commerce saw losses narrow significantly (FY18 operating loss of S$17m vs S$34m in FY17) as management demonstrated good cost control, especially over the peak period.
  • A final dividend of 2.0 S cents was declared, leading to a total DPS of 3.5 S cents for FY18 (unchanged) and a payout of 76%. .
  • Impact from higher terminal dues but mitigating measures will be gradually felt. The terminal due rates were raised from 1 Jan 18. This is the rate that SPOST compensates other postal organisations for deliveries in their countries as determined every four years by the Universal Postal Union (UPU). Though this is negative, the impact of this will eventually be largely softened by SPOST’s higher volume of smaller international airmail parcels, with effect from 2 Jan 18. However, some of the measures taken by SPOST will come into effect progressively (including new product offerings and pricing strategies).
  • Look forward to solid free cash flows after major expansion and M&A. Looking ahead, we forecast SPOST’s free cashflow yield to rise to 6-7% from FY19-20 as capex has peaked, in our view. Over the past five years, the group spent over S$1,138m in capex and investments but we estimate that future maintenance capex at only S$60m- 70m per year.
  • Positive momentums as some key segments are turning around. The e-commerce division is executing well by lowering losses and is showing signs of turning around since 3QFY18. As for logistics, the group is introducing new products, re-engineering its cost base and is in the midst of renegotiating contracts with some clients in Hong Kong that are loss-making. Nevertheless, Quantium Solutions continues to be a key segment in Southeast Asia for clients, with the use of Jagged Peak’s technology. 
  • Elsewhere, contribution from its newly-revamped SingPost Centre retail mall is coming along. The current occupancy as at Mar 18 is at 96% compared to 86% in Dec 17. In terms of asking prices for rental rates, our channel checks indicate it to be in the circa S$6.00psf/month range.


EARNINGS REVISION/RISK

  • We trim our FY19-20 net profit forecasts by 1-3% as we build in more costs, particularly for professional fees in its transformation programme.


VALUATION/RECOMMENDATION

  • Maintain BUY with a SOTP target price of S$1.59 (previously S$1.60). 
  • We remain upbeat on SPOST’s longer-term outlook as key divisions are seeing improving performances and free cashflow is expected to be firm, with an estimated free cashflow yield of 6-8% in FY19-20. This should help sustain a decent dividend yield of 2.8% in FY19 and 3.2% in FY20.


SHARE PRICE CATALYST

  • Better-than-expected recovery in TradeGlobal.
  • Faster-than-expected recovery in Quantium Solutions from measures taken to improve the business such as potential consolidation of unprofitable clients and new product offerings.
  • Higher-than-expected ramp-up at e-commerce logistics hub.





Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-14
SGX Stock Analyst Report BUY Maintain BUY 1.59 Down 1.600



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