Singapore Post - UOB Kay Hian 2019-11-05: 2QFY20 In Line; Still Not In The Clear

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

Singapore Post - 2QFY20 In Line; Still Not In The Clear

  • SINGAPORE POST (SGX:S08) reported 2QFY20 net profit of S$26.8m (-4.6% y-o-y), in line with expectations.
  • The domestic mail segment saw an accelerated decline in business letter volumes and remains a key area of concern, even though international revenue posted agood growth in the quarter. There are some bright spots in postal packages initiatives although they remain longer-term positives.
  • Maintain HOLD and target price of S$1.04. Entry price: S$0.88.



2QFY20 RESULTS


Singapore Post (SPOST) announced in-line 2QFY20 core net profit of S$26.8m, down 4.6% yoy.

  • Singapore Post's 1HFY20 core net profit came in at S$52.4m, representing 49.2% and 49.7% of our and consensus full-year forecasts respectively and in line with expectations. Headline profit was up 10.3% y-o-y due to improved performance and absence of fair value loss on warrants from associates. See SingPost Announcements; SingPost Latest News.
  • Dividend for the quarter remains unchanged y-o-y at 0.5 S cents. See SingPost Dividend History.

Deconsolidating US eCommerce business; operating margin still down.

  • To recap, Singapore Post’s loss-making US eCommerce entities have filed for voluntary petitions for relief under Chapter 11. Excluding the US businesses, operating margin was 11.9% (-3.7ppt y-o-y), dragged by lower contribution from domestic postal and higher volume related expenses.

Postal: Better international contribution but dragged by domestic postal.

  • International revenue had a stronger growth in 2QFY20, up 13.2% y-o-y vs the single-digit improvement in 1QFY20. The domestic postal segment saw a decline, with business letter volumes having a more acute drop in the quarter.
  • The segment was also affected by lower admail volumes although management will look to selectively introduce higher volumes in subsequent quarters. Logistics was relatively unchanged with operating loss at S$0.9m in 2QFY20 (2QFY19: S$0.7m loss).

No more US e-commerce drag, a boost for 2HFY20.

  • The group reported a S$4.5m loss from discontinued operations in 2QFY20, representing the operating loss of the US subsidiaries until Sep 19. Comparatively, the 2HFY19 operating losses for the e-commerce segment amounted to S$31m.

Postal packages initiatives taking shape to guard against disruptors.

  • Singapore Post also announced the introduction of a new package service which will be delivered straight to the recipient’s letterbox (instead of doorstep delivery). According to the group, direct delivery to the letterbox means customers do not need to stay at home to receive their packages and will therefore reduce missed deliveries. Letterbox deliveries aid in operational efficiency and utilises Singapore Post’s natural advantage, differentiating itself against disruptors such as Ninja Van, which do not have the appropriate licence to do so.
  • Separately, Singapore Post also raised airmail rates for letters and mail to aid in the yearly increase in payment made to foreign postal operators, which the group has been absorbing.


STOCK IMPACT


New UPU agreement to accelerate rate increases, but levelling playing field.

  • The Universal Postal Union (UPU) has also recently enacted to accelerate the rate increases for delivery of international parcels. Member countries will also be able to self-declare rates, with management noting that the effects for Singapore Post may be felt from 2021. Although terminal dues are set to increase, it does help the group compete better against overseas postal operators.

Slightly more enthused about combating structural change, but domestic decline still an overbearing concern.

  • We are slightly more encouraged by Singapore Post’s initiatives as the new letterbox package service taps on its dominance in small-packet delivery and avoids competing head-on with disruptors, while also reducing costs.
  • Singapore Post also unveiled a smart shared letterbox concept which includes an automated in-feed module for letters and packets, significantly reducing postmen’s workload. However, these are longer-term positives and the drag from domestic postal does not seem to be abating, of which we are seeing a decline of 7.1% y-o-y in 2QFY20 (1QFY20: -6.7%)


EARNINGS REVISION/RISK

  • None.


VALUATION/RECOMMENDATION

  • Maintain HOLD and SOTarget Price target price of S$1.04. We value:
    1. the mail business at 10x FY20F PE;
    2. logistics business at 8.0x FY20F EV/EBITDA, both in line with peers’ average; and
    3. property at cap rate of 5%.
  • Entry price is S$0.88. See SingPost Share Price; SingPost Target Price.


SHARE PRICE CATALYST

  • Lower-than-expected decline in domestic postal.





Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-11-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.040 SAME 1.040



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