August 7, 2017

SingPost’s overall underlying net profit improved from a low of S$21.4m in 4Q17 to S$26.9m in 1Q18 due to narrowing eCommerce losses, and improved logistics performance for the quarter. Revenue grew by 6.2% y-o-y on the back of growth in international mail revenue and higher contribution from SP Parcels, Couriers Please and Famous Holdings, offsetting declines from domestic mail segment and Quantium Solutions. Meanwhile, operating expenses grew by 11.1% y-o-y to S$330.6m due to higher expenses related to labour and volume, offset by lower selling expenses.

Revenue grew by 9.3% y-o-y/9.5% q-o-q to S$149.8m as international mail revenue continues to see strong growth while domestic mail revenue continues to decline on the back of e-substitution. Operating margins continued to decline from 26.9% in 4Q17 to 24.2% in 1Q18; as a result, operating profit fell to S$36.3m (-13.7% y-o-y).

Revenue increased by 6.1% y-o-y/7.5% q-o-q due to increased eCommerce deliveries in Singapore and Australia, and higher overseas revenue for Famous Holdings. However, Quantium Solutions still faces competition and pricing pressures in North Asia since 4Q17, particularly in Japan and Hong Kong. While operating margin of 2.6% for 1Q18 improved from all-time low of 1.6% in 4Q17, we note that it is still lower than the 4.6% recorded in 1Q17 and high of 5.2% in 3Q17, due to costs related to Regional eCommerce Logistics Hub. We note that Quantium Solutions in Singapore should see improved performance as Lazada Singapore moves its entire warehouse operations to Regional eCommerce Logistics Hub.

eCommerce segment posted operating losses of S$4.2m in 1Q18, which narrowed from S$15.1m in 4Q17. The loss in 4Q17 included one-off write-offs due to TradeGlobal’s customers’ bankruptcy. On a y-o-y basis, operating losses were 18.6% higher. We note that eCommerce revenue came in flat at S$64.7m (1Q17: S$65.3m, -0.9% y-o-y) despite TradeGlobal having lost two large customers in FY17, as Jagged Peak was able to add new customers and increase volumes.

New CEO Mr Paul Coutts and SPOST’s leadership team is currently working with SPOST’s board to perform a strategic review. We understand that the management team does not have a fixed timeline to conclude the comprehensive strategic review as it will take time. We look forward to any updates in the interim

Management has highlighted that there will be changes to eCommerce package rates for settlement within postal for selected locations, depending on the package weights, and management is currently assessing the impact. We are inclined to think that directionally, rates are likely to increase, but await further clarification from management. In our view, this change may pose downside risk to our projections

Besides changes to terminal dues, international mail, which has seen high volumes from the Alibaba Group, has not been able to offset the decline in operating profit from domestic mail which enjoyed higher margins. Postal still accounts for >40% of SPOST’s overall revenue and most of SPOST’s operating profit. We believe that the e-substitution trend is likely to continue, and this segment will continue to weigh down on SPOST’s performance.

While management does not expected TradeGlobal to be profitable for FY18, we are encouraged that Jagged Peak managed to add new customers and process increased volumes in 1Q18, despite challenges faced by TradeGlobal. We believe that various initiatives such as warehouse automation plans and right-sizing of the US operations would still take some time and a full recovery (operating breakeven) for the segment is likely to only kick in come FY19.

The redeveloped SPC mall will have a net lettable area of ~176,500 sqft. We believe that the mall will open progressively in 2HFY18 and full rental income contribution for the mall will kick in from FY19. We estimate the mall to generate ~S$17m per annum.

Maintain HOLD, DCF-backed TP of S$1.26. We maintain our earnings forecasts, recommendation and target price. We believe the market is currently pricing in better recovery for both the logistics and eCommerce segments (compared to our estimates), and has yet to fully price in impending changes to terminal dues which will take effect from 1 January 2018.and may entail downside risks to forecasts. –DBS

SingPost closed at: S$1.310