Singapore Post - UOB Kay Hian 2019-07-02: Restructuring Of Services Still The Focus

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SINGAPORE POST LIMITED (SGX:S08)

Singapore Post - Restructuring Of Services Still The Focus

• SINGAPORE POST (SGX:S08) recently added new service enhancements to shore up standards for postal deliveries. With a new Postal CEO at the helm, operational changes remain very much in focus as fixed costs are gradually built in and remain a near-term drag. Parcel delivery will continue to face competitve pressures as well as the logistics segment.
• Maintain HOLD with a lower target price of S$1.04. Entry price: S$0.88

WHAT’S NEW

Rolling out extended service enhancements.

• SINGAPORE POST (SGX:S08) reiterated its focus on service enhancements from its new CEO of Postal Services, Mr Vincent Phang.
• The group aims to address shortcomings in service lapses in recent years, with a spat of fines by the authorities in failing to meet delivery standards. SingPost was fined S$300,000 and S$100,000 for failing to meet delivery standards in 2018 and 2017 respectively.

ESSENTIALS

Operational changes to increase success rate of deliveries.

• SingPost will put on a trial parcels extended evenings when higher home. Workflow to letterboxes and doorsteps specialisation in type of postmen and optimising delivery routes.
• Postmen engagement is SingPost is looking to public trust trial in Jul 19.

Tech & Infrastructure enhancement in the pipeline.

• Pending regulatory slam-shut versions. This would help improve the security of letters by reducing human errors in which masterdoors are left open unintentionally.
• Another potential new service is the addition of a new paid service in the form of a trackable letterbox delivery which will be on trial in Aug 19.

New Postal Services CEO brings logistics and operations experience.

• Mr Phang was previously ST Logistics’ Group CEO and held various senior leadership positions in the supply chain and logistics industry in Asia.

Facing renewed competition in parcel delivery.

• Although last-mile E-Commerce delivery volumes remain strong, renewed competition may be expected with Grab recently investing and partnering Ninja Van.
• Ninja Van’s logistics services will be available via GrabExpress, extending same-day parcel and courier delivery services to include more options like nationwide scheduled deliveries, potentially allowing it to capture more market share among small and medium-sized sellers and social selling communities, albeit most likely at the expense of a higher cash burn rate. As such, we think SingPost may still face renewed competition in the near term.

Logistics improving but not expecting a major turnaround yet.

• The logistics segment recorded a S$2.5m operating loss in FY19 (FY18: S$10.6m loss), largely from the exit of unfavourable contracts in Quantium Solutions. The group intends to grow its revenue base for the segment, introducing hybrid products to enhance its customer offerings. However, the industry remains challenging; noting that warehouse vacancy rate in Singapore remained high in 1Q19, according to a recent report by Colliers.
• We expect SingPost to record modest operating margins for the segment of 0.5-1.0% in the near term.

STOCK IMPACT

Postal services will take time to see positive contribution.

• SingPost has focused on its service reliability, doubling up on the hiring of postmen with enhanced service initiatives. With costs already in place, it will take some time before efficiency in deliveries enables volume growth to take effect, especially with some of the service trials commencing in the latter half of the year.

Facing headwinds but E-Commerce sale will offer much needed reprieve.

• The sale process of its US E-Commerce businesses is in its early stages. We think the sale could take place within 6-9 months’ time and note SingPost may have the option of disposing the business without value. The E-Commerce segment had an operating loss of S$52m in FY19

EARNINGS REVISION/RISK

We raise our FY20-22 net profit forecasts by 13% (trimmed 2% without effects of perpetuals).

• We remove perpetual securities from our adjusted earnings (in line with reported figures), as well as factor in marginal cost increment from its new service enhancements.
• Without the effects of the change from perpetual securities, our adjusted earnings would have been trimmed by up to 2%.

VALUATION/RECOMMENDATION

Maintain HOLD with a lower SOTP-based target price of S$1.04 as we update our sector multiples.

• We value:
  1. the mail business at 10x FY20F PE (previously 13.8x);
  2. logistics business at 8.0x FY20F EV/EBITDA, both in line with peers’ average; and
  3. property at cap rate of 5%. SingPost looks to be hampered by transformation costs in the near term.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.04 DOWN 1.060