Singapore Post - DBS Research 2019-02-01: US E-Commerce Losses Continue To Widen

SINGAPORE POST LIMITED (SGX:S08) | SGinvestors.io SINGAPORE POST LIMITED (SGX:S08)

Singapore Post - US E-Commerce Losses Continue To Widen

  • SingPost’s 3Q19 results include a S$31.8m exceptional gain; underlying net profit of S$32.9m down 7.5% y-o-y.
  • US eCommerce losses continue to widen; management highlights risk of impairment.
  • Declared interim dividend of 0.5 Sct/share (unchanged from last year).
  • Maintain HOLD, revised Target Price of S$0.92 following earnings adjustments on wider-than-expected USeCommerce losses.



Sustained US eCommerce losses and higher terminal dues imply limited earnings growth, HOLD with revised Target Price of S$0.92.

  • With unabated competition in its US eCommerce business, there is a case for SINGAPORE POST LIMITED (SGX:S08, SingPost) to impair and dispose of its US business to refocus on Asia.
  • While SingPost has seen solid growth at its international mail business, it is likely to be slower going forward due to higher terminal dues which have already started to affect the volumes. 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 revised Target Price of S$0.92.


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.


Valuation:

  • Maintain HOLD with a revised Target Price of S$0.92. We cut FY20F EPS by 9% after accounting for higher-than-expected losses from US eCommerce business.
  • We use discounted cash flow valuation (WACC 7%, terminal growth 3%) to derive our Target Price. Note that SPOST's FY19F earnings have been revised upwards due to the exceptional gains incurred as of 9M19.


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 - US eCommerce losses continue to widen


Underlying profit dragged down by US eCommerce losses.

  • SingPost's underlying net profit declined 7.5% y-o-y to S$32.9m mainly on US eCommerce losses which continued to widen during the quarter, against higher revenues of S$441.4m (+7.6%) due to peak seasonal volumes in the third quarter. Profit on operating activities declined 8.5% to S$42.2m largely due to higher costs incurred in US. Stripping out the US eCommerce business, operating profit would have increased 9.8% y-o-y.
  • While headline profit grew 15.6% to S$50.2m in 3Q19, this was mainly due to S$31.8m of exceptional gain arising from dilution gain of 4PX which ceased to be equity accounted for.

Ongoing efficiencies driven in post and parcel.

  • Revenues rose 9.0% y-o-y to S$213.2m on the back of higher domestic and international deliveries (seasonal effect). Notably, domestic mail revenues saw an increase of 1.6% during the quarter. SingPost continues to drive selected eCommerce parcel delivery into its existing domestic last-mile delivery network.
  • Consequentially, operating margin improved slightly to 22.3% in 3Q19 (3Q18: 22.1%) as transshipment competition continues to be intense with higher terminal dues and volumes under pressure.

Logistics’ contribution remains small.

  • Revenue grew 3.6% y-o-y to S$134m due to better performance in the freight forwarding business under Famous Holdings. Quantium Solutions saw a slight revenue decline of 2.0% to S$25.1m as it continues to review unfavourable customer contracts.
  • As a whole, operating margins improved from 0.8% a year ago to 1.3% in 3Q19 due to reduction in losses from Quantium Solutions.

eCommerce losses continue to widen, management highlights risk of impairment amidst other options.

  • While revenues grew 8.7% y-o-y to S$82.5m, operating losses continued to widen from S$11.2m in 2Q19 to S$13.4m in 3Q19 as competition in the industry remains high with the industry seeing more customer bankruptcies. SingPost was also affected by higher freight and outsourced services during the peak season.
  • Management has highlighted risk of impairment going forward (current carrying value at c. S$90-100m) and has set up a taskforce to evaluate options for the businesses.

Dividends unchanged from last year.

  • SingPost has declared a final dividend of 0.5 Sct this quarter (unchanged from last year), bringing total dividends for the full year to 1.0 Sct.


Outlook and recommendation


Growth to be mainly driven by post and parcel business.

  • As SingPost continues to extract operating efficiencies and gain market share locally amidst slowing growth in international mail, we believe that SingPost’s earnings will still have to be driven by the post and parcel segment due to the unpredictability of logistics segment where SingPost has been facing headwinds.

Partnerships and tie-ups.

  • We continue to look forward to SingPost’s partnerships and tie-ups in a bid to grow its post and parcel segment. In November 2018, a strategic partnership with Park N Parcel concluded where Park N Parcel’s collection points will be included within SingPost’s integrated last-mile platform (LaMP).
  • In the meantime, SingPost is also in discussions with operators in the region to join (LaMP), including an Indonesian last-mile operator.
  • We believe partnerships may be more cost-effective without the need for huge capital injection from SingPost’s end as SingPost continues to seek growth in the segment.


Maintain HOLD with revised Target Price of S$0.92.

  • We believe the widening losses at the US eCommerce businesses will continue to weigh on SingPost’s share price in the meantime.
  • We cut FY20F EPS by 9% after accounting for higher-than-expected losses from US eCommerce business. We use discounted cash flow valuation (WACC 7%, terminal growth 3%) to derive our Target Price.
  • Note that FY19F’s earnings have been revised upwards due to the exceptional gains incurred as of 9M19.





Sachin MITTAL DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-02-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.040 SAME 1.040



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