Singapore Post - UOB Kay Hian 2018-08-06: 1QFY19 A Disappointing Start, Downgrade To HOLD

Singapore Post - UOB Kay Hian Research 2018-08-06: 1qfy19 A Disappointing Start, Downgrade To Hold SINGAPORE POST LIMITED SGX:S08

Singapore Post - 1QFY19 A Disappointing Start, Downgrade To Hold

  • Singapore Post’s 1QFY19 underlying profit of S$25m (-9.2% y-o-y) came in below our and market expectations, dragged by lower associate contributions (4PX) and higher taxes.
  • We cut our FY19-20 net profit forecasts by 12-14% and downgrade SPOST to HOLD with a lower SOTP-based target price of S$1.45 (previously S$1.59). Entry price: S$1.23.


RESULTS

  • Singapore Post’s (SPOST) 1QFY9 underlying profit of S$24.7m declined 9.8% y-o-y (accounting for 19% of our full-year estimates) and was below our and market expectations. The disappointing profit was due to a combination of weaker margins, lower associate contributions (continued losses from 4PX) and higher tax provision for an overseas subsidiary (group 1QFY19 effective tax of 40.8%). Excluding exceptional items, 1QFY19 operating profits showed a slight 1.2% y-o-y improvement.

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  • In terms of the various segments, logistics and property delivered better performances. Logistics returned to the black (S$0.09m operating profit compared with a S$2.5m loss in 1QFY18) whilst property operating profits surged 67% y-o-y to S$13.2m from rental income at SingPost Centre retail mall. On the other hand, operating losses at its eCommerce segment rose 94% y-o-y to S$9.3m due to a combination of sales mix as well as higher integration costs. Postal/parcels segment saw a 3.8% y-o-y dip in operating profits due to lower margins as a result of higher terminal dues that impacted international mail.
  • An interim dividend of 0.5 S cent was declared (unchanged vs 1QFY18), with an implied payout of 76%. This is within group payout policy of 60-80%.

One step forward, two steps back.

  • Although we think the group has made good progress with its logistics by turning it around in the last few quarters (new products, re- engineering its cost base and renegotiating contracts with some clients), we are disappointed with the eCommerce segment.
  • The sharp jump in operating losses was a negative surprise as the market was expecting this to narrow. In addition, the rise in group volume-related of expenses of 6.2% y-o-y, which exceeds the top-line growth of only 3.3% y-o-y, suggests that more needs to be done to drive top-line growth.

Higher terminal dues but mitigating measures will be gradually felt.

  • The terminal due rates were raised from 1 Jan 18, which is the rate that SPOST compensates other postal organisations for deliveries in their countries. This is determined every four years by the Universal Postal Union (UPU). Although this is negative, the impact of this will gradually by softened by SPOST’s higher volume of smaller international airmail parcels.

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 FY19-21 as capex has peaked, in our view.
  • Over the past five years, the group had spent over S$1,138m in capex and investments but we estimate future maintenance capex at only S$60m-70m per year.

Property another positive.

  • Contribution from its newly-revamped SingPost Centre retail mall is ramping up nicely. Current occupancy as at 30 Jun 18 stood at 96.7% compared with 95.6% as at 31 Mar 18.


EARNINGS REVISION/RISK

  • We trim our FY19-21 net profit forecasts by 12-14% as we factor in more costs, particularly on volume-related costs and a rise in FY19F effective tax of 27% vs 23% previously given additional provisions for a foreign subsidiary.
  • We understand that FY20F effective tax should normalise back at 22-23%.


VALUATION/RECOMMENDATION


Downgrade to HOLD with a lowered SOTP-based target price of S$1.45 (previously S$1.59).

  • The only consolation is that the group’s free cash flow is expected to be strong, with a projected free cash flow yield of 6-8% in FY19-21F. This should help sustain a dividend yield of 2.6% in FY19 and 3.1% in FY20.


SHARE PRICE CATALYST

  • Turnaround in performance of its eCommerce segment.
  • Rising contributions from its logistics division 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 Research | https://research.uobkayhian.com/ 2018-08-06
SGX Stock Analyst Report HOLD Downgrade BUY 1.45 Down 1.590



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