UOB Kay Hian has downgraded its rating for Singapore Post (SingPost) from “buy” to “hold”, while lowering its target price from $2.25 to $1.64 respectively.
In a Monday report, analysts Andrew Chow and Thai Wei Ying say they have revised their earnings estimates down by 11-18% for FY17-18, anticipating SingPost’s earnings to be reined in by integration headwinds and goodwill provisions from leadership changes.
However, they do expect earnings to pick up in FY18.
“We continue to view positively SPOST’s steps to improve corporate governance, and deem its transformation to an e-commerce and logistics outfit as necessary,” say Chow and Thai.
According to UOB, the following are likely to bring about stock impact:
1. Integration of TradeGlobal
SingPost’s chairman Simon Israel has said it may take years before the company’s acquired business, TradeGlobal, contributes materially to its bottom line. Observing how SingPost recorded a net loss of $0.08 million for TradeGlobal in FY16, Chow and Thai expect the full-year impact from TradeGlobal to “be a drag” on SingPost’s FY17 earnings as well. This is due to higher amortisation expense and lower-than-expected operating margin following integration efforts.
2. Delayed plans for CouriersPlease
Chow and Thai note that the business case for Australian small-parcel delivery company CouriersPlease (CP), which was acquired by SingPost’s subsidiary Quantium in Dec 2014, is “slightly behind schedule”. They attribute the delay to a slowdown in the economy, adding that the FY16 cash flow growth rate assumption for CP was cut to 8.6% from 10% in FY15.
Nevertheless, the analysts say they understand from the management that SingPost has been “making strides in achieving synergies” through initiatives such as launching new international and domestic services, as well as improving on last mile delivery through the launch of POPstation.
3. Possible write-down of goodwill in FY16
The acquisition of TradeGlobal in December last year recorded $169.1 million worth of goodwill, contributing significantly to the doubling SingPost’s goodwill from FY15 to FY16 to $493.5 million. UOB believes the newly-appointed CEO, which the company targets to bring in by end-December 2016, could start with clean slate by writing down goodwill, which does not match up to growth assumptions in FY17.
4. Potential dividend policy review
Assuming a dividend per share (DPS) of 7 cents which the group aims to pay under the current dividend policy, Chow and Thai say dividend payout would exceed 100% on their new earnings estimates for FY17. This gives reason for a dividend policy review, which the analysts would only “make commercial sense” such that its dividend policy is aligned with earnings, ensuring sustainability for the business.
5. Tripartite synergy… Or none
With repeated delays of the long-stop date between SingPost’s transaction with Alibaba as well as the latter’s acquisition of Lazada, UOB believes there has been a “change in partnership dynamics”. While the analysts say there is “potential for synergy creation” between the three parties, they acknowledge the complexities involved with the additional involvement of Lazada, where any business development may alter the dynamics among the three.
Shares of SingPost closed 0.7% at $1.48.
This article first appeared in The Edge Singapore Market Report.
