Singapore Post - CGS-CIMB Research 2019-04-05: Jagged No More

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SINGAPORE POST LIMITED (SGX:S08)

Singapore Post - Jagged No More

• We think exiting its US e-commerce unit is positive for Singapore Post, as losses will no longer be a drag, prompting a higher EPS and our rating upgrade to ADD.
• Apart from the immediate boost to EPS, we see potential improvements in logistics and synergistic M&As as future areas of growth.
• We see limited downside at 16x FY3/21F P/E (1 s.d. below historical mean), with major concerns priced in and 3-4% forecasted dividend yield.

US divestment to take pressure off profitability and share price

• Since Singapore Post (SGX:S08) first ventured into the US e-commerce business in Oct 2015, with an initial stake acquisition of 71% in Jagged Peak (S$22.5m), followed by a 96.3% stake purchase of TradeGlobal (S$236m), its US operations have been largely unprofitable (see Figure1 in PDF report attached below), while Singapore Post’s share price has also de-rated from a peak of S$1.90 (see Figure2 in PDF report).
• A combination of intensifying competition and customer bankruptcies have resulted in widening losses over the past quarters despite revenue growth, suggesting that the US operations have yet to achieve optimal scale and operating leverage, with a turnaround likely to be costly and longer than expected. With the divestment of its US e-commerce business in FY20F (projected completion), we expect FY20-21F EPS to grow by 17.6-20.3% p.a. for Singapore Post.
• Meanwhile, Singapore Post’s post and parcel segment has been reporting steady profit growth as its estimated 20% market share in e-commerce logistics and growing international mail volumes helped to mitigate the structural challenges in its traditional mail business (see Figure3).
• An uptick in utilisation level at the regional e-commerce logistics hub ( > 90% for warehousing portion, opened in Nov 2016) and exit of unprofitable customer contracts at Quantium Solutions (QSI) should continue to contribute to the recovery of logistics margins over FY19-21F. Other parts of the logistics segment include Famous Holdings (freight forwarding) and Couriers Please (parcel delivery in Australia).

All bad news, including impairment risk, already priced in

• Apart from the e-commerce woes, we think a couple of other recent events have also weighed on Singapore Post’s share price:
  1. intensifying competition in North Asia that affected logistics’ profitability,
  2. impact of terminal dues changes on international mail volumes, and
  3. lapses in service standards for domestic postal mail which resulted in a total S$400k fine for 2017-2018, and potentially lower postal margins from higher staff costs.
• We think these major concerns have been priced in, and Singapore Post’s share price re-rating is on the horizon as the group delivers on sustained improvements in both the postal and logistics segments.
• While we understand that the US businesses have a carrying value of S$90m- 100m, the attributable goodwill stands at c.S$30m. We think the US e-commerce business could be worth at least S$70m-80m, using a conservative 0.3x P/sales multiple (vs. 6.4x industry average). A 20-30% haircut to the current book value would also imply an impairment of S$20m-30m.

Growth and re-rating catalysts in the pipeline

• Following the decision to exit US e-commerce operations, we think Singapore Post will seek to preserve its domestic market share in last mile delivery by enhancing service quality, and defend its postal margins via increasing automation and reliance on the postal network.
• Another growth priority for Singapore Post would be leveraging its Alibaba partnership to drive logistics volumes and margin, to which management hopes to achieve close to 5-6% OPM in the next two years. Whilst committed to its key capabilities in Asia and ASEAN, we see potential gaps in Singapore Post’s end-to-end ecommerce strategy, which could be bridged by synergistic M&As, in our view.
• Singapore Post also owns a sizeable real estate portfolio of S$1bn investment properties as at end FY3/18, of which Singapore Post Centre (SPC) accounts for S$859m. There are other properties which may not be fully utilised and currently form part of its PPE (FY18: S$532m) that has not been revalued. We see the potential to further unlock value in these properties (including some of the legacy post offices) in the longer term, either through possible sale or higher rental income.

VALUATION AND RECOMMENDATION

US sale to boost FY20-21F EPS; upgrade from Hold to ADD

• We raise Singapore Post’s FY20-21F EPS by 4.9-17.9% as we factor in
  1. the completed sale of US operations in FY20F,
  2. lower postal margins from additional postmen hired and wage adjustments, as well as
  3. higher logistics profitability.
• Our DCF-based target price hence increases to S$1.20 (7.6% WACC, 1.5% LTG), which implies 18.2x FY21F P/E.
• With limited downside at 1 s.d. below historical average (16x FY3/21F P/E) and double-digit earnings growth from FY20-21F, we upgrade our rating from Hold to ADD.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2019-04-05

SGX Stock Analyst Report ADD UPGRADE HOLD 1.20 UP 1.030