Groundwork firmly in place

SingPost’s end-to-end ecommerce logistics offering complements its key competitive advantage of being the lowest cost provider, and allows it to tap into a wider customer base. With a good structure firmly in place, the next step would be to replicate its model across the region to expand its network. We keep our Add rating and DCF-based target price of S$1.96 (7% WACC), with the key re-rating catalyst being a potential JV with Alibaba. Apart from

this, M&As in ecommerce logistics will also speed up its regional expansion.

What Happened

SingPost hosted a site tour to view its end-to-end suite of ecommerce logistics services. These range from front-end solutions such as website design to back-end services including warehousing and last-mile delivery.

What We Think

With a full suite of ecommerce logistics solutions, we believe SingPost has laid the groundwork for regional expansion. While most third-party logistics (3PL) providers mainly focus on warehousing and delivery, SingPost’s added services allow it to capture a wider audience, from international brands looking to set up a standalone online retail presence (monobrand channel) to SMEs that want to list their products on an online marketplace (multibrand channel). SingPost views the monobrand segment as a key growth area, given that consumers trust brands’ official websites more than online marketplaces, especially in less ecommerce-ready markets like Indonesia. Moreover, with the exception of website design, the infrastructure and systems needed to run an ecommerce operation for each brand are the same, thus making it highly scalable. As logistics is a volume game, we think that SingPost needs to ramp up order flow to capture efficiency gains and keep its pricing competitive. Order flow is limited by customer acquisitions, which have shown promising signs (doubled from 300 to 600 ecommerce customers as at end-FY14) but still need to expand more rapidly. A potential tie-up with Alibaba could bring in bigger volumes, not only through Alibaba’s expansion into ASEAN, but also a global ecommerce logistics platform that will be made available to third-party users.

What You Should Do

SingPost’s share price has traded sideways since its run-up in Jun when it announced that Alibaba was taking a stake in SingPost. Even the news of a postage rate hike, which we estimate would lead to 6-7% EPS accretion, barely moved its share price. We believe the next re-rating hinges on the potential JV with Alibaba to set up an international ecommerce logistics platform. M&A opportunities in ecommerce logistics also remain a key catalyst for the stock.

What does postal hike mean?

• Received approval for 12-30% rate hike across domestic and international mail from 1st Oct 14; first hike in 8 years to mitigate cost increase
  
• Annual revenue to improve S$12m-16m but most of it will flow to the bottom line; our FY15F/16F EPS raised 3%/5% conservatively
  
• Maintain BUY with revised DCF based (WACC 6.3%, terminal rate 2%) TP of S$2.12. Offers potential return of 25%
  

Rate hike in response to declining domestic mail volume and rising costs. Since 2008, according to SPOST, labor, and fuel costs have gone up ~30% each, inflation has risen 26% while terminal dues for international mail have risen 43% and will further rise 37% by 2017. About 60% of the domestic mail and ~30% of international outgoing mail is still regulated across which SPOST has raised postal rates by 12-30%, in our estimates.

The hike will be effective from 1st Oct 2014 and SPOST will absorb the cost increase for SMEs in the first year. Based on last year volume, SPOST believes that annual revenue impact could be ~S$16m, however, the actual impact may be ~S$12m due to rebates to SMEs in the first year. Given that mail segment is a high margin business, this should translate into 3%/5% higher FY15F/16F EPS conservatively.

SPOST should command premium valuation for three reasons. Assuming that SPOST makes S$300m worth of acquisitions at 12-15x PER, it may add S$20-25m or 15-20% to our FY16F earnings. Secondly, SPOST is incurring ~S$15m developmental expenses each year, mainly in hiring and training people which could continue for another 2-3 years. We expect SPOST to register healthy growth beyond that. Lastly, higher e-commerce volumes could surprise in FY16F as we have assumed only ~S$50m worth of business from its Chinese e-commerce partner in our forecasts.

A little help goes a long way

SingPost will revise its domestic and international postage rates effective 1 Oct 2014, the first rate hike since 2006. This will help SingPost to cope with increases in labour costs, fuel prices and international settlement rates for outbound mail and partially offset its continued investments in the postal system. We raise our EPS forecasts by 3-7% to factor in the impact of the new postage rates and our DCF-based target price rises to S$1.96 (7% WACC). We keep our Add call, with the key potential catalysts being: 1) M&A opportunities, and 2) JV with Alibaba.

What Happened

SingPost will revise domestic and international postage rates with effect from 1 Oct 2014. This marks the first rate hike since 2006. Domestic postage rates will increase by 4-20 S cts while international postage rates will rise by 5-25 S cts. The registered article fee for international mail will also be raised from S$2.20 to S$2.50. To help mitigate the impact of the postage rate increase, SingPost will be giving out 10m free stamps to households and charities and offer a 5% rebate to SME franked mail customers for the first year.

What We Think

SingPost has been challenged with a 25-32% rise in labour and fuel costs since its last postage rate hike in 2006 and this new rate hike will help SingPost to cope with cost pressures as mail volumes continue to decline. International settlement rates or terminal dues on outbound mail have risen by 43% due to Singapore being re-classified as a “New Target Country” by the Universal Postal Union in 2012. The rate is expected to climb another 37% by 2017, or an estimated S$35m-40m over the next 2-3 years, which we have previously factored into our forecasts. We estimate that the revised postage rates will add S$8m to revenue in 2HFY15 and S$16m (+1.3-1.6%) from FY16 onwards. On the net profit level, the impact will be more pronounced with a 6-7% upgrade to our estimates from FY16 onwards as the price increase should flow through to the bottomline. This is after accounting for the cost of the 10m free stamps in the first year.

What You Should Do

While this news is a positive, we believe the key potential catalysts for the stock are: 1) M&A opportunities in the e-commerce logistics space, and 2) a JV with Alibaba, which can bring in more e-commerce-related volumes. Our rating remains an Add.

Reap 3.5% yield till it takes off

• Net profit of S$39.2m (+5% y-o-y) was in line; excluding one-off gains, net profit would have been stable at S$36.2m. Interim dividend of 1.25 Scts was in line.
• Net profit was impacted by S$4m developmental costs for e-commerce and also a temporary increase in labour costs till sorting machine is upgraded by the end of 2014.
• Alibaba did not contribute much but discussions are underway as SPOST is hot on the heels of this opportunity
• BUY with S$2.00 TP based on DCF (WACC 6.3%, terminal growth 2%). Three key medium term catalysts are in place

Highlights

Group revenue was up 5% y-o-y, benefitting from ecommerce. Mail revenue grew 7% y-o-y on the back of growth in international mail and stable domestic mail from e-commerce volumes. Without e-commerce volumes, international mail would have hardly grown while domestic mail would have declined. Logistics grew 4% y-o-y despite restructuring at Quantium Solutions. Net profit was boosted by a one-off gain of ~S$3m from property sale. In discussions with Alibaba on international e-commerce logistics platform. SPOST wants to tap on e-commerce opportunities in Southeast Asia and beyond but is still negotiating with Alibaba on this front.

Our View

Upgrade of sorting machine at S$45m capex towards the end of 2014 should reduce costs. The machine will be able to sort more mails and packages and increase the throughput. However, during the transition, SPOST has hired 70 additional postmen.

Expect double-digit growth in e-commerce logistics. However, this should be partially offset by a 1-4% decline in the domestic mail segment. Given that e-commerce accounted for 26% of total revenue in FY14, one may expect a high single-digit to low double digit growth in group revenue.

Recommendation

SPOST should command a premium valuation for three reasons. Firstly, assuming that SPOST makes S$300m worth of acquisitions at 12-15x PE, it may add S$20-25m or 15-20% to our FY16F earnings. Secondly, SPOST is incurring ~S$15m developmental expenses each year in mainly hiring and training people, which could continue for another 2-3 years. We expect SPOST to register healthy growth beyond that. Thirdly, higher volumes from Alibaba could surprise in FY16F as we have assumed only ~S$50m worth of business from Alibaba in our forecasts. BUY for its 3.5% yield, while awaiting its price ascent.

Reap 3.5% yield till it takes off

• Net profit of S$39.2m (+5% y-o-y) was in line; excluding one-off gains, net profit would have been stable at S$36.2m. Interim dividend of 1.25 Scts was in line.
• Net profit was impacted by S$4m developmental costs for e-commerce and also a temporary increase in labour costs till sorting machine is upgraded by the end of 2014.
• Alibaba did not contribute much but discussions are underway as SPOST is hot on the heels of this opportunity
• BUY with S$2.00 TP based on DCF (WACC 6.3%, terminal growth 2%). Three key medium term catalysts are in place

Highlights

Group revenue was up 5% y-o-y, benefitting from ecommerce. Mail revenue grew 7% y-o-y on the back of growth in international mail and stable domestic mail from e-commerce volumes. Without e-commerce volumes, international mail would have hardly grown while domestic mail would have declined. Logistics grew 4% y-o-y despite restructuring at Quantium Solutions. Net profit was boosted by a one-off gain of ~S$3m from property sale. In discussions with Alibaba on international e-commerce logistics platform. SPOST wants to tap on e-commerce opportunities in Southeast Asia and beyond but is still negotiating with Alibaba on this front.

Our View

Upgrade of sorting machine at S$45m capex towards the end of 2014 should reduce costs. The machine will be able to sort more mails and packages and increase the throughput. However, during the transition, SPOST has hired 70 additional postmen.

Expect double-digit growth in e-commerce logistics. However, this should be partially offset by a 1-4% decline in the domestic mail segment. Given that e-commerce accounted for 26% of total revenue in FY14, one may expect a high single-digit to low double digit growth in group revenue.

Recommendation

SPOST should command a premium valuation for three reasons. Firstly, assuming that SPOST makes S$300m worth of acquisitions at 12-15x PE, it may add S$20-25m or 15-20% to our FY16F earnings. Secondly, SPOST is incurring ~S$15m developmental expenses each year in mainly hiring and training people, which could continue for another 2-3 years. We expect SPOST to register healthy growth beyond that. Thirdly, higher volumes from Alibaba could surprise in FY16F as we have assumed only ~S$50m worth of business from Alibaba in our forecasts. BUY for its 3.5% yield, while awaiting its price ascent.