Singapore Post - DBS Research 2018-08-06: US Operations Turnaround To Take Longer Time

SINGAPORE POST LIMITED SGX:S08

Singapore Post - US Operations Turnaround To Take Longer Time

Singapore Post’s 1Q19 underlying profit of S$24.7m (-10% y-o-y, +61% q-o-q) was below our S$30m estimate.
eCommerce operations in the US report widening losses versus expectations of narrower losses.
Downgrade to HOLD with revised Target Price of S$1.28.

We project an 8% earnings CAGR over FY18-20F versus 14% earlier as we expect eCommerce segment breakeven to be delayed to FY21F from FY20F earlier due to the competitive pressures in the US business.
While the worst may be over for the postal and logistics segments, SingPost needs to deliver double-digit earnings growth to sustain its rich valuations. SPOST has outperformed STI by 6.5% ytd which may not continue going forward, in our view.

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It was due to eCommerce segment losses widening to S$9.8m (+94% y-o-y) versus our estimate of S$4m coupled with one-off tax provision of S$3.6m.

TradeGlobal’s progression towards narrower losses will play a big role.
In the medium term, we believe that new areas of opportunities, such as food, grocery, and medicine delivery, as well as the potential divestment of SPC mall, could be catalysts.

Downgrade to HOLD with revised Target Price of S$1.28. We cut FY19F/20F EPS by 8%/11% on slower turnaround of TradeGlobal.
We also raised WACC assumption to 6.5% from 6% earlier in our DCF model (terminal growth rate 3%) to reflect the volatile nature of eCommerce-related revenue.

Impact of higher terminal dues (increase in international small packets' postage rates cannot negate rise in terminal dues) and further escalation of eCommerce losses could depress SPOST's bottom line in the medium term.
The opening of Alibaba’s regional logistics hub is also a downside risk for SPOST.

It was due to eCommerce segment's operating losses widening to S$9.8m (+94% y-o-y) versus our estimate of S$4m coupled with one-off tax provision of S$3.6m.

This was partly due to SPOST being more selective on some international mail consignments and partly due to slowdown in the international mail volume after the postal hike. The cause of the slowdown is still unclear. Operating profit for the segment dropped 4% y-o-y to S$41.8m.

Operating profit rose to S$0.1m versus $S2.5m losses in 1Q18 due to SPOST being more selective on account selection and due to cost reduction programme.

As required by listing rules, SingPost adopted Singapore Financial Reporting Standards (International) SFRS(I) from 1 April 2018, SingPost had to restate prior year numbers. SPOST also made some changes to our segmental reporting. Main change – SP Parcels (our commercial last-mile business) is now moved under Postal, and forms a new Post and Parcel segment.

Logistics - now comprises only three entities: Quantium Solutions, Couriers Please, Famous Holdings
Logistics - “Others”: the self-storage business revenues are now reported under Property revenue
eCommerce - TradeGlobal & Jagged Peak now reported as “US Businesses”
eCommerce - “SP eCommerce”: vPost is now separated from SP eCommerce and reported under International Mail
Property now reports both revenue and operating profit (both commercial rental and self-storage)
Group Operating Revenue now includes revenue from property commercial rental (previously under Other income line)

Sachin MITTAL DBS Group Research Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2018-08-06

SGX Stock Analyst Report HOLD Downgrade BUY 1.28 Down 1.550