Singapore Post - DBS Research 2019-05-07: Lack Of Growth Drivers

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SINGAPORE POST LIMITED (SGX:S08)

Singapore Post - Lack Of Growth Drivers

• SINGAPORE POST LIMITED (SGX:S08)'s revenue and operating profit fell across all non-property segments; 4Q19 underlying net profit of S$100m declined 5.8% y-o-y, in line with our estimates.
• Further one-off S$99m impairment of US businesses.
• Final DPS of 2.0 Scts/share proposed; total dividends for FY19A 3.5 Scts/share unchanged y-o-y.
• Maintain HOLD, revised Target Price of S$0.96.

Two key headwinds imply limited earnings growth, HOLD with revised Target Price of S$0.96.

• Besides the long-standing challenge of declining domestic mail volume, SINGAPORE POST LIMITED (SingPost, SGX:S08) faces two key headwinds:
  1. higher terminal dues adversely affecting international mail volume which has been the key growth driver so far, and
  2. higher operating costs in order to improve service quality in Singapore.
• It may take SingPost 2-3 years to overcome these challenges by investing in technology, in our view. While we like potential exit from the US business, it is difficult to see real growth drivers besides cost-reduction programme over the next 2-3 years.
• We maintain our HOLD call with a revised Target Price of S$0.96.

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 newsflow on the successful sale of the US businesses as well as improving operating metrics of core businesses would be potential catalysts. In the medium term, we believe potential divestment of SPC mall could be a catalyst.

Valuation:

• Maintain our HOLD call with a revised Target Price of S$0.96.
• We use discounted cash flow valuation (WACC 7%, terminal growth 3%) to derive our Target Price. Note that SingPost's FY20/21F earnings have been revised largely on the back of its eCommerce businesses. We expect the sale to conclude before FY21F.

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.

WHAT’S NEW - Refocusing on core businesses

Revenues fall across non-property segments; underlying net profit declines on higher losses for US businesses.

• SingPost's 4QFY19 headline revenues fell 2.1% to S$374.1m as revenue declined across non-property segments, especially in logistics and eCommerce.
• NPAT came in at a loss of S$75.1m, largely on the back of impairments booked during the quarter (S$98.7m relating to US businesses, S$9.9m relating to overseas operations restructuring). Underlying net profit declined 6.1% to S$14.5m on higher losses for US businesses and lower margins across all segments.
• Excluding US businesses, underlying profit would have risen 15.8% y-o-y.

Booked impairment losses for US businesses a second time.

• During the quarter, a second impairment of S$98.7m was booked to the carrying value of TradeGlobal and Jagged Peak (S$67.6m goodwill, $31.0m PPE). This comes after the first impairment announced in 3Q17 of S$185m relating to TradeGlobal.
• According to SingPost, the carrying value of the US businesses had been substantially impaired, save for working capital that may be recoverable. SingPost has commenced on a sale process for the US businesses in the meantime.

Postal segment's margins declined on higher expenses.

• Revenues were largely flat at S$188.8m (-0.2% y-o-y) as lower domestic mail revenues buffered higher international mail revenues. Operating profit declined to S$34.4m (-8.3% y-o-y) on a lower operating margin of 18.2% (4Q18: 19.8%) as SingPost was affected by higher expenses which included the hiring of additional postmen and increasing incentive payments, and lower non-core mail items (e.g. ad-mail) during the quarter.

Logistics segment continues to see challenges.

• Revenue declined to S$116.7m (-2.9% q-o-q) as higher freight rates at Famous were offset by revenues decline at Quantium and Couriers Please. Quantium continues to exit unfavourable contracts while Couriers Please revenues were affected by FX movements.
• SingPost also incurred one-off restructuring costs of approximately S$2m in the quarter against the previous year’s S$1m one-off items. As a result, losses widened y-o-y to S$4.7m (4Q18: S$ -0.2m). With the last unprofitable contract exiting in February, Quantium is now able to focus on building revenues going forward.

eCommerce segment's operating losses expected to continue till exit.

• Losses widened from S$13.4m in 3Q19 to S$18.0m this quarter on declining revenues of S$57.0m (-7.7% y-o-y) amidst intensifying competition and more customer bankruptcies seen.

Dividends.

• SingPost has declared a final dividend of 2 Scts this quarter, bringing total dividends for the full year to 3.5 Scts, unchanged from last year.

Outlook

US businesses’ sale.

• According to management, there are a number of parties who have indicated interest for the US businesses’ sale. SingPost has just begun a formal sale process and we expect the sale to be concluded before FY21F. We have built in full-year losses (narrowing from FY19A) in our estimates for FY20F.

Improving service quality.

• SingPost has announced several initiatives including increasing its delivery workforce, and enhancing remuneration to improve its service levels. SingPost has also stopped performing non-contract businesses (e.g. ad-mail) as management seeks to realign priorities. We expect such permanent expenses to continue weighing on its postal margins, against operating synergies from integration of its domestic post and parcel divisions.

Challenging environment continues for postal.

• While we continue to expect international mail to grow, SingPost notes that “transshipment competition is intense and volumes will continue to come under pressure, especially with higher terminal dues”.

Valuation and recommendation

• Maintain HOLD with a revised Target Price of S$0.96.
• We use discounted cash flow valuation (WACC 7%, terminal growth 3%) to derive our Target Price. Note that SingPost's FY20/21F earnings have been revised -1/+1% for FY20/21F mainly on assumptions for its eCommerce businesses. We expect the sale to conclude before FY21F.

Rui Wen LIM DBS Group Research | Sachin MITTAL DBS Research | https://www.dbsvickers.com/ 2019-05-07

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.96 UP 0.920