Singapore Post Ltd (SPOST) - Maybank Kim Eng 2018-07-02: FY18 Annual Report Insights

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SINGAPORE POST LIMITED SGX: S08

Singapore Post Ltd (SPOST) - FY18 Annual Report Insights

Better alignment with shareholder interests

• We glean a few insights from SingPost’s recently released FY18 annual report which showed
  1. an improvement in alignment of Directors’ remuneration with the company’s performance,
  2. an improvement in its debt structure, net gearing and interest cover,
  3. potential for further rationalisation of its investments of recent years, and
  4. some lingering residual risk of goodwill impairment.
• Overall we remain positive on SingPost being a prime beneficiary of robust ASEAN e-commerce growth. 
• Maintain BUY and DCF Target Price of SGD1.50 (WACC 7.6%, LTG 1.0%).

Recent Board revamp a positive

• After a major Board revamp over the past 18 months following shareholder criticism over certain acquisitions and a subsequent Special Audit, we find that the Boards’ remuneration structure is better aligned with the company’s underlying performance, reversing the growth trend as a percentage of underlying profit for the prior four years.
• As a % of underlying net profit it fell by 0.06% in FY18. In absolute terms, Board remuneration fell 14% y-o-y and was down 27% from FY16 levels. Also the ratio of independent director’s increased y-o-y from 50% to 60%.

Improvement in debt structure

• SPOST’s debt structure at end-FY18 improved notably:
  1. total indebtedness fell 33% y-o-y,
  2. current borrowings dropped significantly and
  3. EBITDA interest cover rose to 9.8x from 8.2x in FY17.
• The lion’s share of borrowings now is long-term, providing some protection against a rising interest rate environment. Our sensitivity analysis indicates every 1% increase in interest rate will reduce FY19E EPS by 0.3%.

Residual issues with investments and goodwill

• There is potential for several non-core assets to be divested in our view, especially the self-storage businesses that we believe have little synergy with SPOST’s core business. Also, its headquarters, SingPost Centre, could potentially be divested as the recent refurbishment could help realise better market values. 
• On the other hand, we believe some goodwill impairment risks still exist even after the FY17 haircut, especially so for units like Quantium Solutions that still carry substantial goodwill and are still underperforming.

FY18 Annual Report Insights

• Directors’ remuneration in FY18 was more aligned with performance as total remuneration as a percentage of underlying net profit fell for the first time in five years from 1.24% in FY17 to 1.18% in FY18. The ratio of independent directors as a percentage of total has also increased y-o-y to 60% from 50%.
• Another point to note after the Board revamp in the past 18 months is that nine-out-of-ten directors now have a service tenure of less than five years; a big positive in our view. Followers of the company might recall that prior to FY17, the Board suffered from the issue of a number of Independent Directors being entrenched in their positions for periods as long ranging as 10-18 years (obviously raising the question of the true degree of ‘independence’ the previous Board had).
• We also note that CEO total remuneration as a percentage of underlying net profit has reduced significantly in FY17 and was stable for FY18.
• We observe that SPOST’s debt structure has improved. FY18 current borrowings as a percentage of total dropped from 41% in FY17 to 10%, which will alleviate refinancing pressures this year. Net gearing including perpetual securities fell from 25% in FY17 to 20% in FY18 whilst EBITDA interest expense cover rose from 8.2% to 9.8%. Around 90% of SPOST’s debt is long-term in nature with the earliest refinancing in Mar 2020.
• We believe there could be potential upside from divestments of what we believe are non-core operations in self-storage businesses and property. Additionally SPOST could also potentially divest or spin-off its headquarters, a mixed-use commercial and retail building, into a REIT. It has recently reopened after a major renovation. 
• We think that the balance sheet still carries some risk of further goodwill impairment charges. Total intangible assets made up c.14% of total assets in FY18 with most of its goodwill arising from acquisitions. What stands out from the list of assets carrying goodwill is Quantium Solutions as it has been underperforming as indicated in recent results. 

John Cheong CFA Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-07-02

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