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.

CAPITALISING ON REGIONAL E-COMMERCE LOGISTICS

• E-Commerce growth beyond Alibaba
  
• Seeking to be a main stakeholder in value chain
  
• Raise growth rate assumptions
  

Developing a fully integrated eCommerce logistics hub in Singapore

Singapore Post (SingPost) announced last evening that it will be developing a fully integrated regional eCommerce logistics hub to cater to its expanding ecommerce logistics business and the fast-growing ecommerce market. The three storey hub in Tampines LogisPark will be the first of its kind in SE Asia, equipped with state-of-the-art technology. Scheduled to be fully operational in 2H16, the estimated development cost is S$182m, and includes lease of land, construction costs and equipment costs. This will be funded internally from cash.

Capitalising on online retail and logistics solutions

There is room for Singapore’s e-Commerce scene to grow, as the country’s e-commerce sale volume as compared to the total retail market size was remains relatively low. Singapore’s rising importance as a logistics hub is also highlighted by recent investments in warehouse and distribution facilities by DHL and Menlo Logistics. In addition, SingPost, being a postal operator, may be already sitting on a huge amount of data waiting to be monetized. The partnership between postal operators and eretailers may thus extend beyond the posts’ role of enablers of e-Commerce to supporting the e-retailers to expand and grow by analyzing, translating and interpreting data.

Raising growth rate assumptions and fair value estimate

In our 3-stage DCF model, we have forecasted earnings growth of 7-9% for FY15-16, and 16-17% in FY17-18 as SingPost builds up its e-Commerce capabilities and reputation. However, we have also assumed higher working capital requirements and capital expenditure, resulting in a 5-7% growth in free cash flow to equity (FCFE). For FY19-FY23, we increase our FCFE growth rate assumption from 5% to 9%, which is justifiable given 1) the significant growth potential of e-Commerce sales in Singapore and the region, 2) the accompanying rise in logistics services that are required to support this growth 3) the likelihood of SingPost directing its huge cash pile to earnings-accretive investments in the next few years. With this, our fair value estimate rises from S$1.78 to S$2.09. Upgrade to BUY.

Catering for growth with new Regional eCommerce Logistics Hub

• Developing fully integrated eCommerce Logistics Hub in Singapore to cater to expanding ecommerce logistics business and rapid ecommerce market growth.
  
• Project is estimated to cost S$182 million and is expected to complete by end Jan 2016; development will be funded internally from Group’s cash holdings.
  
• We viewed the new hub development positively, indicating huge growth potential in SingPost’s ecommerce logistics business.
  
• Maintain TP at S$2.07; revised rating to Accumulate as share price moved closer to our TP since our initiation on 12 Sep-14.
  

What is the news?

SingPost has recently announced it will be developing a fully integrated regional eCommerce Logistics Hub to cater to its expanding ecommerce logistics business as well as to address global growth in ecommerce market. Located in Tampines LogisPark, the 553,000 sqf hub comprises 3-storey integrated centre, with fully automated parcel sorting facility and 2 warehousing floors, and an adjoining 8- storey office block to house SingPost’s local and regional logistics operations. The logistics hub and adjacent office building will be built on land leased from JTC corporation for 30 years. Construction of the new hub is expected to complete by end Jan 2016. The development cost for the new hub is estimated to cost S$182 million and will be funded internally from the Group’s cash holdings.

How do we view this?

SingPost has a net cash of S$210m (ex S$350m perpetual securities) as of end Jun- 14, giving an excess of S$28m after internal financing of the new logistics hub. With an estimated FY15F cash flow from operations (over S$200m) more than sufficient to meet both dividends to shareholders as well as distributions to perpetual securities holders, we think SingPost would unlikely be gearing up in the short run as it continues its ongoing S$100 investment in postal service and infrastructure enhancement. We view the new eCommerce Logistics Hub development positively, signalling significant growth potential in SingPost ecommerce business.

Investment Action

As the hub would only be ready in 2016, we do not foresee much impact on revenue and margins in the current and the next fiscal year. We make an adjustment on FY15F/16F capex and maintain our TP at S$2.07. While we continue to be positive on the growth prospects, valuation may seem a little stretched at current share price, with forward PE at ~26.5x (impacted by dilution effects on EPS from new share issuance to Alibaba). We revise our rating to Accumulate.

Catering for growth with new Regional eCommerce Logistics Hub

• Developing fully integrated eCommerce Logistics Hub in Singapore to cater to expanding ecommerce logistics business and rapid ecommerce market growth.
  
• Project is estimated to cost S$182 million and is expected to complete by end Jan 2016; development will be funded internally from Group’s cash holdings.
  
• We viewed the new hub development positively, indicating huge growth potential in SingPost’s ecommerce logistics business.
  
• Maintain TP at S$2.07; revised rating to Accumulate as share price moved closer to our TP since our initiation on 12 Sep-14.
  

What is the news?

SingPost has recently announced it will be developing a fully integrated regional eCommerce Logistics Hub to cater to its expanding ecommerce logistics business as well as to address global growth in ecommerce market. Located in Tampines LogisPark, the 553,000 sqf hub comprises 3-storey integrated centre, with fully automated parcel sorting facility and 2 warehousing floors, and an adjoining 8- storey office block to house SingPost’s local and regional logistics operations. The logistics hub and adjacent office building will be built on land leased from JTC corporation for 30 years. Construction of the new hub is expected to complete by end Jan 2016. The development cost for the new hub is estimated to cost S$182 million and will be funded internally from the Group’s cash holdings.

How do we view this?

SingPost has a net cash of S$210m (ex S$350m perpetual securities) as of end Jun- 14, giving an excess of S$28m after internal financing of the new logistics hub. With an estimated FY15F cash flow from operations (over S$200m) more than sufficient to meet both dividends to shareholders as well as distributions to perpetual securities holders, we think SingPost would unlikely be gearing up in the short run as it continues its ongoing S$100 investment in postal service and infrastructure enhancement. We view the new eCommerce Logistics Hub development positively, signalling significant growth potential in SingPost ecommerce business.

Investment Action

As the hub would only be ready in 2016, we do not foresee much impact on revenue and margins in the current and the next fiscal year. We make an adjustment on FY15F/16F capex and maintain our TP at S$2.07. While we continue to be positive on the growth prospects, valuation may seem a little stretched at current share price, with forward PE at ~26.5x (impacted by dilution effects on EPS from new share issuance to Alibaba). We revise our rating to Accumulate.

Capitalising on regional e-commerce logistics

• e-Commerce growth beyond Alibaba
  
• Seeking to be a main stakeholder in the value chain
  
• Raise growth rate assumptions
  

Developing a fully integrated eCommerce logistics hub in Singapore

Singapore Post (SingPost) announced last evening that it will be developing a fully integrated regional eCommerce logistics hub to cater to its expanding ecommerce logistics business and the fast-growing ecommerce market. The three storey hub in Tampines LogisPark will be the first of its kind in SE Asia, equipped with state-of-the-art technology. Scheduled to be fully operational in 2H16, the estimated development cost is S$182m, and includes lease of land, construction costs and equipment costs. This will be funded internally from cash.

Capitalising on online retail and logistics solutions

There is room for Singapore’s e-Commerce scene to grow, as the country’s e-commerce sale volume as compared to the total retail market size was remains relatively low. Singapore’s rising importance as a logistics hub is also highlighted by recent investments in warehouse and distribution facilities by DHL and Menlo Logistics. In addition, SingPost, being a postal operator, may be already sitting on a huge amount of data waiting to be monetized. The partnership between postal operators and e-retailers may thus extend beyond the posts’ role of enablers of e-Commerce to supporting the e-retailers to expand and grow by analyzing, translating and interpreting data.

Raising growth rate assumptions and fair value estimate

In our 3-stage DCF model, we have forecasted earnings growth of 7-9% for FY15-16, and 16-17% in FY17-18 as SingPost builds up its e-Commerce capabilities and reputation. However, we have also assumed higher working capital requirements and capital expenditure, resulting in a 5-7% growth in free cash flow to equity (FCFE). For FY19-FY23, we increase our FCFE growth rate assumption from 5% to 9%, which is justifiable given 1) the significant growth potential of e-Commerce

. . . . .

sales in Singapore and the region, 2) the accompanying rise in logistics services that are required to support this growth 3) the likelihood of SingPost directing its huge cash pile to earnings-accretive investments in the next few years. With this, our fair value estimate rises from S$1.78 to S$2.09. Upgrade to BUY.