Singapore Post Ltd - CGS-CIMB Research 2018-08-06: 1QFY9 Missed Delivery, Delayed Turnaround

Singapore Post Ltd - CGS-CIMB Research 2018-08-06: 1qfy19 Missed Delivery, Delayed Turnaround SINGAPORE POST LIMITED SGX:S08

Singapore Post Ltd - 1QFY9 Missed Delivery, Delayed Turnaround

  • Earlier signs of potential turnaround dissipated with Singapore Post (SPOST)’s dismal 1QFY19 results; core PATMI of S$24.7m came in 6% below our/consensus expectations.
  • Deviance was due to larger-than-expected associates’ losses, higher taxes and wider e-commerce losses. Higher rental income offered partial buffer to earnings decline.
  • Decelerating international mail growth, low logistics profitability and continuous ecommerce investments are areas we will monitor ahead.
  • We turn more cautious on SPOST’s operating environment and downgrade the stock from Add to HOLD, with a lower target price of S$1.27 and 3% dividend yield.

1Q19 results miss, dragged by exceptionals and poor e-commerce

  • Singapore Post (SPOST)’s 1QFY19 headline PATMI of S$18.7m (-40% y-o-y) was a miss due to larger- than-expected associate losses (mainly 4PX as it invested further in warehousing and infrastructure), S$6m fair value (FV) loss in warrants of associated company and higher taxes. Excluding exceptional items, 1Q19 core PATMI accounted for 20%/19% of our/consensus full-year forecasts.
  • 1Q19 interim DPS of 0.5 Scts was unchanged y-o-y; free cash flow doubled from 1Q18’s S$32m to S$62m on the back of lower capex.

~ SGinvestors.io ~ Where SG investors share

Better q-o-q margins, slower volume growth for postal

  • There was a pick-up in postal OPM from 4Q18’s 20.5% to 22.5% (1Q18: 24.7%) as measures implemented mitigated the higher terminal dues (w.e.f Jan 2018). However, we noted international mail growth of 13.0% y-o-y was significantly slower than previous quarters of 30-40%, even after including vPost contribution. 
  • On top of a high FY18 base and the company turning away from less profitable markets, we see concerns from possible market share loss and an overall slowdown in the industry.

Logistics profitability remains low

  • The logistics segment turned profitable in 1Q19 (1Q18: -S$2.5m) and was stable on a q-o-q basis as Quantium Solutions (QSI) narrowed its losses by 45% y-o-y while earnings contribution from Famous Holdings and Couriers Please was higher. Without SP Parcels, logistics OPM looked thin at 0.1% in 1Q19.
  • The key positive was higher rental income (1Q19: S$13.2m, 1Q18: S$7.9m) and occupancy at SingPost Centre retail mall of 96.7% (previous 95.6%).

E-commerce may take longer to turn profitable

  • While e-commerce-related revenue now accounted for 53.7% of total revenue, slightly better than 1Q18’s 51%, 1Q19 losses for the segment widened substantially to S$9.3m (1Q18: -S$4.8m, 4Q18: -S$5.8m). We attribute this to
    1. changes in sales mix that saw lower fulfillment revenue vs. freight revenue, and
    2. higher technical labour costs to support business integration efforts.
  • Sales from US businesses also fell 4.3% due to pricing pressures.

Accounting changes allow for better segmental comparison

  • Singapore Post (SPOST) also announced the reclassification of business units beginning 1 April 2018 into Post and Parcel (will now include SP Parcels and vPost), Logistics (will no longer include property and SP Parcels), e-Commerce (both TradeGlobal and Jagged Peak will be consolidated into the US business) and Property.

Downgrade from Add to HOLD

  • While the share price has declined 9% post its 1Q19 results, we still see some execution risks and a protracted earnings recovery. Hence, downgrade the stock from Add to HOLD and lower our DCF-based Target Price to S$1.27; 3% dividend yield provides near-term support.
  • We cut our FY19-21F EPS by 17-22% to reflect its 1Q19 results.
  • Upside/downside risks come from changes in the competitive landscape and overseas execution.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-06
SGX Stock Analyst Report HOLD Downgrade ADD 1.27 Down 1.590