Singapore Post - UOB Kay Hian 2019-05-08: FY19 Below Expectations; Looking To Home Ground Advantage

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

Singapore Post - FY19: Below Expectations; Looking To Home Ground Advantage

  • SINGAPORE POST LIMITED (SGX:S08) reported 4QFY19 core net earnings of S$14.5m (-6.1% y-o-y). Earnings were below expectations with service enhancement initiatives hitting margins of the postal segment.
  • The US e-commerce business remains a drag and is in the early stages of its sale process. The group is looking to focus on markets closer to home, where it has a competitive advantage.
  • Maintain HOLD with a revised target price of S$1.06. Entry price: S$0.95.



Singapore Post's FY19 RESULTS


FY19 core net profit of S$100.1m, below expectations.

  • SINGAPORE POST LIMITED (SGX:S08) reported a 4QFY19 underlying net profit of S$14.5m (-6.1% y-o-y). Results are below expectations with full-year earnings at S$100.1m (-5.8% y-o-y), coming in at 95% and 94% of our and consensus’ estimates respectively.
  • Final dividend remains unchanged at 2.0 S cents.

Operating margins take a hit, all segments (excluding property) were down.

  • Singapore Post's operating margin in 4QFY19 came in at 4.0% (-4.3ppt y-o-y), dragged down by higher losses from e-commerce and a weaker postal segment from service enhancements.
  • For the quarter, volume-related expenses were up (+2.4% y-o-y) along with labour-related expenses (+3.6% y-o-y). The logistics segment recorded an operating loss of S$4.7m for the quarter, incurring one-off costs of nearly S$2m relating to relocation and reinstatement costs.

Postal saw lower operating profit of S$34.4m.

  • Revenue was flat at S$188.8m (-0.2% y-o-y) with only marginal gains (+3.0% y-o-y) from international mail. This was offset by lower domestic mail revenue as the group reduced non-core mail items such as ad-mail, which have a non-standardised ad-hoc process.
  • Management will continue rationalising and streamlining product lines to enhance profitability.
  • In the quarter, service improvements were also made on the back of fines received by the governing authorities. Singapore Post added 100 postmen and enhanced remuneration for successful deliveries and will continue to enhance its postal infrastructure at home to improve its service reliability. As a result, operating margin declined to 18.2% (-1.6ppt y-o-y).

Logistics’ operating loss rises to S$4.7m.

  • Revenue was marginally lower at S$116.7m (-2.9% y-o-y), driven by Quantium Solutions [QS] (-9% y-o-y) and Couriers Please (CP) (-7.5% y-o-y). QS continues to see the exit of unfavourable customer contracts with pressures placed on selling prices while CP was impacted by the depreciation of the Australian dollar.

E-commerce remains a drag; sale of US business in the early stages.

  • The e-commerce unit reported a higher operating loss of S$18.0m (3QFY19: -S$13.4m, 4QFY18: -S$6.8m) with intensifying competitive pressures. Singapore Post recorded a S$98.7m impairment for its US e-commerce business which means the loss-making units have now been substantially impaired.
  • The sale process of Singapore Post’s US e-commerce businesses is in the early stages and management hopes to complete the transaction at least by the end of FY20.


STOCK IMPACT


Development of postal infrastructure will take time to see fruition.

  • Singapore Post is still coping with volume pressures from an e-commerce era as it works towards improving its service reliability.
  • Cost-saving measures in the form of tech and infrastructure enhancements will take time to bear fruit as management seeks to work with different parties such as town councils and the IMDA.

Focusing on home-based advantage.

  • While management still sees a future in e-commerce, its focus is very much on the Asia Pacific region in which it can look to tap on synergistic advantages from existing businesses.


EARNINGS REVISION/RISK

  • Cut our FY20-21 net profit forecasts by up to 7% to reflect margin pressure on its postal segment from service enhancement initiatives as well as a lower revenue growth for QS.
  • Our adjusted net profits, including the impact after perpetual securities, are S$94m (-7%) and S$106m (-3%) for FY20-21 respectively.


VALUATION/RECOMMENDATION


Maintain HOLD with a revised SOTP-based target price of S$1.06.

  • We roll our sector multiple to FY20 and account for the exclusion of its e-commerce businesses. While Singapore Post looks to be hampered by transformation costs in the near term, more clarity on future investments may help re-rate the stock.
  • Entry price is S$0.95.





Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-05-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.06 UP 1.040



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