Singapore Post - DBS Research 2018-11-05: Limited Catalysts For Now


Singapore Post - Limited Catalysts For Now

  • US eCommerce losses continue to widen; turnaround will take time. 
  • 4PX will no longer be accounted for as an associate given dilution in Singpost’s stake. 
  • Declared interim dividend of 0.5 Scts/share (unchanged from last year). 
  • Maintain HOLD, revised Target Price of S$1.04 following earnings adjustments as US eCommerce losses continue to widen. 

Limited catalysts for now, maintain HOLD with Target Price of S$1.04.

  • While the worst may be over for the postal and logistics segments, US eCommerce losses continue to widen and we think that it may take 2-3 years for the turnaround to take place, versus our earlier expectations of one year.
  • While Singapore Post (SingPost) has seen solid growth at its international mail business, we expect slower growth going forward due to intense competition and higher terminal dues which have started to affect the volumes already.
  • The stock is trading at c. 20x PE (below its 5-year average PE of 28x) but we believe there are limited catalysts for SingPost for now and maintain our HOLD call with a Target Price of S$1.04.

Where We Differ:

  • In the longer run, we believe that SingPost possesses the ability and resources to leverage on its existing network to recapture its market share in Singapore as it remains the dominant player locally with low cost of capital.

Potential catalyst:

  • In the near term, any material turnaround at SingPost’s eCommerce and logistics segments would be a major catalyst for SingPost's share price. In the medium term, we believe potential divestment of SPC mall could be a catalyst.

Key Risks to Our View:

  • 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 SingPost's bottom line in the medium term.
  • The opening of Alibaba’s regional logistics hub is also a downside risk for SingPost.

WHAT’S NEW - Ongoing turnaround takes time

Profits declined on the back of negative contribution from associate companies, higher taxes and one-off exceptional items.

  • Headline revenues grew 8.8% to S$888m, supported by property revenue due largely to the SPC retail mall.
  • Overall, profits declined on the back of share of S$4m loss largely due to associate company 4PX which saw higher expenses to drive the growth of eCommerce volumes from Alibaba, as well as an exceptional loss of S$3m relating to fair value loss on warrants from another associate company.

Positive developments for parcels amidst slowing growth of international mail.

  • Revenues rose 8.8% y-o-y to S$888m on the back of higher international mail revenue.
  • Operating profit margins improved y-o-y from 88.8% in 2Q18 to 88.8% in 2Q19 (1Q19: 88.8%) as SingPost has started pumping parcels through the domestic postal network as it integrates its last mile delivery operations across post and parcel divisions. As a result, this offset the impact of lower domestic letter mail volumes.

Logistics sees mixed performance.

  • Revenues were largely flat at c.S$888m, driven by improvements in freight forwarding business against declining revenues in Quantium Solutions and CouriersPlease.
  • SingPost continues to review unfavourable customer contracts.

eCommerce losses widened.

  • Revenues were largely flat at c.S$88m as US businesses saw price pressures. Operating losses widened to S$88m as some customer contracts were renewed at lower rates as price pressures hit amidst higher transformation costs.
  • Management has indicated that they see US businesses as an integral part of SingPost’s business and will continue to work on turning it around as it enters peak delivery season for the next eight weeks.

4PX ceases to be an associate company.

  • SingPost’s shareholdings of 4PX has been diluted from 88.8% to 88.8% as of 1 November 2018 and 4PX will cease to be an associate company. As such, losses from 4PX will no longer be reflected in SingPost’s income statement going forward but will be reflected in the statement of other comprehensive income.

Dividends unchanged from last year.

  • SingPost has declared a final dividend of 8.8 Scts this quarter (unchanged from last year), bringing total dividends for the full year to 8.8 Scts.

Outlook and Recommendation

Limited catalysts for now.

  • Since the introduction of terminal dues, management has started to see a structural shift taking place for international mail, as it makes less sense for lower-value products to be sent internationally from China. As such, higher terminal dues have started to impact some of the transshipment volumes.
  • In the meantime, we believe the turnaround for US eCommerce businesses will take time.

Maintain HOLD, Target Price S$1.04.

  • We maintain our HOLD call with a revised Target Price of S$1.04.
  • We cut FY19F/20F EPS by 16%/7% after accounting for higher-than-expected associate and exceptional losses, as well as slower turnaround of the US eCommerce business.
  • We use discounted cash flow valuation (WACC 7%, terminal growth 3%) to derive our Target Price.

Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | 2018-11-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.04 DOWN 1.280