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Simons Trading Research

Author: simonsg   |   Latest post: Thu, 14 Nov 2019, 4:47 PM

 

Singapore Post - No Sale of US Businesses But Relieving Losses; Still a Mixed Bag

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  • Singapore Post announced that there were no acceptable offers for its US e-commerce businesses and the units would file for bankruptcy relief instead. The costly investment has been a drag on the group and might offer some relief given the slightly earlier-than-expected removal.
  • However, its postal segment is not out of the woods yet and we maintain HOLD with a target price of S$1.04.
  • Entry price: S$0.90

What’s New

No acceptable offers.

  • SINGAPORE POST LIMITED (SGX:S08) has provided an update on the sale process of its US e-commerce business. The group concluded the sale process with no acceptable offers and has filed for voluntary petitions for relief under Chapter 11 of the bankruptcy code for its US business. There were 105 parties that showed interest and signed non-disclosure agreements, leading to 8 expressions of interest and finally resulting in 2 non-binding offers.
  • Singapore Post cited that the offers were on terms and conditions that were commercially unfeasible and did not proceed with any offers.

No longer accounting for US businesses’ losses.

  • Under the supervision of the bankruptcy court, the US businesses’ intend to “pursue the sale of all or substantially all of their assets” and would remove the accounting of its losses. Singapore Post is expected to incur administrative fees during the process for Chapter 11 proceedings, though the group has commented that these are not expected to be material.

Essentials

Disappointment with the absence of sale, but value unlikely to have been high.

  • While the news of the absence of sale is disappointing, we think that any sale is not likely to have had a material disposal value given the widening losses. The group had also already substantially impaired the business units of TradeGlobal and Jagged Peak.
  • The total impairment was at S$98.7m in FY19, with S$67.6m for goodwill and intangible assets, and the balance S$31.0m for property, plant and equipment.

Slightly earlier-than-expected removal of US businesses; minimising losses.

  • To recap, Singapore Post had initially guided that the sale of US e-commerce businesses would take place by the end-FY20 (Mar 20). The non-inclusion of the US businesses comes 1-2 quarters earlier than we had expected and allows Singapore Post to minimise losses from the units. This could be useful given that the latter half of the year contributes to a higher volume of e-commerce (eg. Black Friday, Christmas).

Still facing headwinds from domestic postal segment.

  • The domestic postal segment will still face headwinds from its service enhancement initiatives with the potential for additional costs (from initiatives such as the installation of new letterbox deliveries and extended hours for doorstep deliveries).
  • We also view that contribution to revenue will continue to be affected by the lack of ad-mail revenue, with operating margins to be under pressure given that the postal segment recorded an 8.9% y-o-y decline in operating profit for 1QFY20.

Stock Impact

US e-commerce venture a tough pill to swallow.

  • The initial purchase of the US e-commerce business was made at up to approximately US$180m in 2015, and this venture has not paid off. The disposal of the segment was slightly earlier than expected, which might translate to savings of approximately S$5m-8m per quarter.
  • However, we remain conservative on Singapore Post given the larger q-o-q profit decline seen from its postal segment of S$3-4m in the recent quarter, which may offset some of the gains.

Earnings Revision / Risk

None.

  • We had accounted for nine months of losses for the US e-commerce business for FY20 but are still weary of charges such as legal or admin claims which may be associated with the Chapter 11 filings.

Valuation / Recommendation

Maintain HOLD with an unchanged SOTP-based target price of S$1.04.

  • We value:
    1. the mail business at 10x FY20F PE;
    2. logistics business at 8.0x FY20F EV/EBITDA, both in line with peers’ average; and
    3. property at cap rate of 5%. Entry price: S$0.90.
  • Our valuation remains unchanged as we have already factored in the removal of Singapore Post e-commerce business. An improvement in the postal segment from an increase in the volumes of international mail as well as further clarity on future investments may help re-rate the counter.

Source: UOB Kay Hian Research - 20 Sep 2019

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