Winner takes all

In a price-competitive industry where the winner takes all, having Alibaba as a strategic partner will ensure that SingPost can scale up and obtain sufficient volumes to become the lowest cost provider. Furthermore, Alibaba’s decision to partner SingPost rather than other regional logistics providers reaffirms the company’s leading position in e-commerce logistics. We maintain our Add rating and DCF-based target price of S$1.86 (WACC 7.1%). The potential key catalysts are rising e-commerce activity and potential M&As.

What Happened

We hosted CFO, Ng Hin Lee and Deputy CFO, Daniel Phua at our 4th Annual Asia Pacific Conference, where they met with over 30 fund managers. Discussions centred on the recently announced collaboration with Alibaba and its M&A plans.

What We Think

Alibaba collaboration will multiply volumes. While details of the JV with Alibaba are yet to be set in stone, SingPost believes that its partnership with Alibaba has the potential to increase shipment volumes by 3-4x. We think these volumes will come gradually rather than overnight as 1) both parties will need to integrate their back-end systems, and 2) SingPost will over time build significant scale across the region, funded by Alibaba’s S$312m investment and its net cash of S$170m.

Potential M&A in Indonesia. SingPost has identified Indonesia as a key market in Southeast Asia where it is lacking sufficient presence. Its subsidiary and key logistics arm, Quantium Solutions, set up a JV in Indonesia this year after the government relaxed laws which previously restricted foreign firms from owning a stake in logistics companies. SingPost sees more room for growth through M&A in Indonesia as the current JV only serves the island of Java and there is also a need to establish delivery networks in other parts of the country. A study by eMarketer forecasts that B2C e-commerce sales in Indonesia will rise by 37% in 2015, just second to China’s 43% and double the global average of 18% (Fig 1), which makes Indonesia a huge untapped market.

What You Should Do

Stay invested. SingPost offers an attractive dividend yield of 4% while also providing potential earnings upside from the collaboration with Alibaba and M&A activity as it expands its regional e-commerce logistics operations.

Open sesame

SingPost’s strategic partnership with Alibaba opens doors via access to funds for larger-scale M&As and the opportunity to leverage on Alibaba’s customer base to scale up its regional e-commerce logistics operations. We raise our FY16-17 EPS by 2-3% to factor in higher transhipment and e-commerce logistics volumes, but cut our FY15 EPS by 6% due to share dilution post-equity issuance. Our DCF-based target price rises to S$1.86 (WACC 7.1%). We maintain our Add call, with potential M&As and growing e-commerce volumes are the key catalysts.

What Happened

Alibaba plans to invest S$312.5m in SingPost for the purchase of 30m existing treasury shares and 190m new ordinary shares at S$1.42/share. This gives Alibaba a 10.35% stake in SingPost, making it the second largest shareholder behind SingTel. The two parties also signed an MOU to negotiate a potential JV that will create a platform for international e-commerce logistics.

What We Think

We are positive on Alibaba’s investment as: 1) the new source of funding will open the door to new investment opportunities in e-commerce logistics regionally, 2) SingPost will benefit from tremendous business volumes originating from Alibaba’s e-commerce businesses, and 3) the enlarged scale of the business will bring cost efficiencies, giving SingPost leverage over its competitors in a price-competitive ASEAN market. We expect the positive impact to show up in Quantium Solutions (higher warehousing and fulfillment demand), Famous Holdings (freight forwarding) and international mail (higher transhipment volumes and last-mile delivery).

Near term dilution not a big concern. While SingPost guided that FY14 EPS would have been 10.4% lower with the equity issuance, we think that the dilutive impact will only be in the near term (FY15), as the synergies created and growth from the new JV should outweigh the dilution from FY16 onwards.

What You Should Do

Maintain Add. SingPost is showing steady progress in transforming into a regional e-commerce logistics player, and its collaboration with Alibaba will provide it with fuel to expand more aggressively in the region, with stronger earnings growth potential both organically and via M&As.

Alibaba takes a stake

• Issues
  shares to Alibaba at S$1.42/share
  
  
• Longer term growth
  
• Dilutive effect in the short term
  

Share issuance to Alibaba at S$1.42/share

Following a trading halt yesterday morning, SingPost announced that it has entered into an investment agreement with Alibaba Investment Ltd (wholly owned subsidiary of Alibaba Group Holding Ltd), under which Alibaba Investment will buy 30m existing ordinary shares held in treasury by SingPost and 190.096m new ordinary shares. The total 220.096m shares represent 11.55% of SingPost’s existing issued and paid-up share capital (excluding treasury shares), and upon completion, Alibaba will hold 10.35% of SingPost. The subscription price is at S$1.42/share, translating to gross proceeds of S$312.5m for SingPost.

What it means for SingPost

Both companies also signed an MOU to allow them to discuss and negotiate a JV in the business of international e-commerce logistics. From SingPost’s point of view, besides the creation of new relationships and opportunities for strategic cooperation with Alibaba, this move will allow it to benefit from Alibaba’s expertise in e-commerce and business volumes. In particular, priority will be given to SingPost’s logistics services (e.g. when Alibaba needs to ship goods to certain parts in SE Asia) based on commercial terms. SingPost will also have to step up on its investment efforts to achieve the full regional value chain of ecommerce logistics that is able to handle Alibaba’s volumes. By obtaining access to more of Alibaba’s volumes, SingPost would be able to obtain a scale effect and bring down cost per unit of good handled, though it is hard to quantify the near term impact given the lack of details so far.

Dilutive effect; FV drops to S$1.38

We assume a higher terminal growth rate in our FCFE valuation (2.5% vs 2% previously) due to a possibly higher growth potential over the longer term, but after taking into account the dilutive effect of the placement, our fair value estimate drops from S$1.42 to S$1.38. Maintain HOLD, though we note that sentiment on the stock may be strong in the near term due to factors such as the “Alibaba effect”

Alibaba takes a stake

• Issues
  shares to Alibaba at S$1.42/share
  
  
• Longer term growth
  
• Dilutive effect in the short term
  

Share issuance to Alibaba at S$1.42/share

Following a trading halt yesterday morning, SingPost announced that it has entered into an investment agreement with Alibaba Investment Ltd (wholly owned subsidiary of Alibaba Group Holding Ltd), under which Alibaba Investment will buy 30m existing ordinary shares held in treasury by SingPost and 190.096m new ordinary shares. The total 220.096m shares represent 11.55% of SingPost’s existing issued and paid-up share capital (excluding treasury shares), and upon completion, Alibaba will hold 10.35% of SingPost. The subscription price is at S$1.42/share, translating to gross proceeds of S$312.5m for SingPost.

What it means for SingPost

Both companies also signed an MOU to allow them to discuss and negotiate a JV in the business of international e-commerce logistics. From SingPost’s point of view, besides the creation of new relationships and opportunities for strategic cooperation with Alibaba, this move will allow it to benefit from Alibaba’s expertise in e-commerce and business volumes. In particular, priority will be given to SingPost’s logistics services (e.g. when Alibaba needs to ship goods to certain parts in SE Asia) based on commercial terms. SingPost will also have to step up on its investment efforts to achieve the full regional value chain of ecommerce logistics that is able to handle Alibaba’s volumes. By obtaining access to more of Alibaba’s volumes, SingPost would be able to obtain a scale effect and bring down cost per unit of good handled, though it is hard to quantify the near term impact given the lack of details so far.

Dilutive effect; FV drops to S$1.38

We assume a higher terminal growth rate in our FCFE valuation (2.5% vs 2% previously) due to a possibly higher growth potential over the longer term, but after taking into account the dilutive effect of the placement, our fair value estimate drops from S$1.42 to S$1.38. Maintain HOLD, though we note that sentiment on the stock may be strong in the near term due to factors such as the “Alibaba effect”

Post-dated potential

SingPost’s FY14 core net profit of S$145m met expectations at 100% of our forecast and 101% of the consensus number. Revenue growth was mainly driven by e-commerce and recent acquisitions, which helped to offset the decline in its traditional mail business. We maintain our Add rating, but trim our FY15-16 EPS forecasts to reflect higher costs. Our DCF-based target price rises to S$1.61 (WACC 7.3%) after rolling forward to FY15. Rising demand for low-cost e-commerce logistics solutions in Asia is a key catalyst. We also see upside potential from M&A activities as SingPost looks to expand its e-commerce logistics capabilities and network across the region.

Results highlights

4QFY14 revenue grew 5.9% yoy on the back of: 1) higher transhipment volumes, 2) growth in vPOST shipments, and 3) full recognition of contributions from Lock+Store and Famous Holdings, acquired in 4QFY13. Excluding the two acquisitions, organic revenue growth was 3% – slower than the run-rate of 6-9% in recent quarters due to seasonality and the sale of Clout Shoppe during the quarter. Core net profit declined marginally (-1.3% yoy) as a result of the higher restructuring and development costs (estimated S$15.5m, of which S$9m was for e-commerce and S$6.5m for the mail segment).

Ongoing e-commerce expansion

SingPost is showing promising signs of progress in the e-commerce space, with over 600 e-commerce customers now, double last year’s 300. SingPost is also rapidly expanding its overseas presence – Quantium Solutions (its primary vehicle for e-commerce logistics growth) recently set up a JV in Indonesia to provide warehousing and freight forwarding services, and Lock+Store will soon introduce its self-storage services in Malaysia. SingPost’s strong net cash position of S$170.3m (3QFY14: S$134.6m) leaves room for further acquisitions in the e-commerce logistics space, which can provide potential earnings uplift.

Maintain Add on post-transformation growth potential

SingPost declared a final DPS of 2.5 Scts, bringing total DPS to 6.25 Scts. This rewards investors with an attractive yield of 4.3% while waiting for earnings growth to come post-transformation. We think that SingPost is positioned to benefit from the rising demand for e-commerce logistics solutions in the region, given its low-cost advantage and full suite of services provided.