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Monday, February 13, 2017

Singapore Post Ltd - Decent ops marred by unfortunate circumstances

Results missed on poorer US operations 
3QFY3/17 core net profit of S$31.4m (+16% qoq, -29% yoy) was a disappointment amid seasonally stronger volumes (Singles Day, Black Friday, Christmas). Revenue fell slightly short of expectations on lower contributions from the ecommerce segment, especially at TradeGlobal (TG). While operating profit at the postal/logistics segments performed in line/exceeded expectations, S$8.4m in operating losses at the ecommerce segment brought overall operating profit down to S$37.3m (-2% qoq, -32% yoy). 
 
Strong AliExpress volumes lifted international mail contributions
 
Postal revenue grew 13% qoq and 10% yoy, lifted by higher international mail revenue (+24% qoq, +11% yoy) as SPOST handled more AliExpress shipments, helped by the Singles Day sales event. Postal operating margins rose slightly qoq to 26.9% (2QFY17: 26.2%) on better operating leverage, and operating profit rose 16% qoq to S$38.5m. SPOST continues to engage in conversations with Cainiao, Lazada and Redmart on future collaboration, and plans to increase outbound mail in addition to transshipments. 
 
Logistics saw strong qoq improvement
 
We were pleasantly surprised by the improvement in logistics operating profit to S$8.8m, which grew 78% qoq. All businesses saw higher revenue, with overall logistics revenue up 11% qoq and 6% yoy. While startup costs at the new ecommerce logistics hub continue to hurt margins and operating profit was still down 27% yoy, SPOST managed to improve utilisation from 10% to 18% at the facility, partially helped by the peak period. 
 
TradeGlobal missed expectations; risk of impairment but not news
 
TG was the key culprit for the group’s poor overall performance. It was expected to post positive profits but instead suffered losses due to: 1) high cost of seasonal fulfillment labour, 2) loss of a key client that filed for bankruptcy and 3) a client that insourced its freight operations. As TG is performing below its base case, it could face impairment in 4Q, which we had highlighted in an earlier note in Jul 2016. We expect cost pressures to ease following a restructuring of TG’s operations. Jagged Peak was profitable in 3Q. 
 
Maintain Add
 
We continue to like SPOST for its growth potential in ecommerce logistics following its JV with Alibaba. It also has the potential to divest non-core assets (e.g. self-storage, retail mall). The stock trades at 21x forward P/E, an attractive level for earnings recovery in FY18 following the re-opening of the SPC retail mall in mid-2017. Maintain Add, with a lower DCF-based target price of S$1.62 (7% WACC) as we cut FY17-19 EPS by 6-10% for lower ecommerce profits. Key risk is fierce competition displacing SPOST’s volumes. 

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