SGX Yield Stock

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”