Singpost – CIMB

Take profit

1HFY3/15 core net profit of S$73.7m formed 46% of our and 47% of consensus full-year forecasts. We view the results as largely in line as we expect a stronger 2H to be driven by the postage rate hike (effective Oct) and full contributions from its recent M&As. However, we cut our FY15-17 EPS by 4-9% to take into account the enlarged share base, and also in anticipation of higher costs as SPOST continues to expand its regional footprint. Our DCF-based target price is unchanged after taking into account a higher net cash position from the proceeds of the issuance of shares to Alibaba. While we like the stock fundamentally, we believe valuations are rich at this point, and would advise investors to take profit. Thus, we downgrade to Hold from Add.

Mail disappointed, logistics impressed

The mail segment disappointed, as domestic mail saw an unexpectedly sharp decline in revenue of 5% yoy (1Q: -2% yoy excluding one-off gains). Due to the lower proportion of higher-margin traditional mail revenue, mail operating margin fell to 27.6% (1Q: 28.4%) and operating profit fell 3% qoq. Meanwhile, logistics surprised us with a higher operating margin of 5.4% (1Q: 3.9%) despite larger contributions from the lower-margin freight forwarding businesses, including the recent acquisitions of Tras-Inter Co. and F.S. Mackenzie. The warehousing unit, Quantium Solutions, saw impressive revenue growth of 9% qoq, driven by an increase in ecommerce logistics activities.

Gaining traction in ecommerce but costs may escalate

In 1HFY15, SPOST had 1,000 ecommerce customers, up from 600 in FY14. Ecommerce accounted for 26.9% of 1HFY15 revenue, up from 23.8% in 1HFY14 (+20% yoy growth in ecommerce revenue). Management explained that in addition to regional customers, it was also targeting smaller brands looking to expand in a particular country. To address this market, SPOST plans to invest in its own delivery channel in ASEAN, which we believe will be capital intensive and is likely to put pressure on margins. We believe that volumes will have to come in more aggressively to match the costs from these ongoing investments.

We downgrade to Hold

SPOST’s share price has risen by 25% since Alibaba announced that it was taking a 10.3% stake in SPOST. At 24x FY16 P/E, SPOST’s valuations are already the highest among peers, while its earnings growth profile remains moderate as SPOST is still in the investment phase. We advise investors to take profit at the current levels, and would look for a better re-entry point.

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