• Lower underlying net profit
• Margins decline
• Dividend policy review completed

Underlying net profit down 27.9% YoY

Singapore Post (SingPost) reported a 22.3% YoY rise in revenue to S$321.7m but saw a 41.2% drop in net profit to S$31.4m in 2QFY17, partly due to the absence of one-off gains that were recorded in 2QFY16 (disposal of DataPost). However, underlying net profit of S$27.1m in 2QFY17 was also 27.9% lower YoY. 1H17 revenue and PATMI both met 50% of our full year estimates, but the latter accounted for 46% of Bloomberg’s consensus estimate; we expect earnings revisions from the street.

Interim dividend of S$0.01 vs. S$0.015 last year

An interim dividend of S$0.01/share has been declared, lower than the S$0.015/share dividend last year. The board has completed a review of the dividend policy and the dividend policy is now based on a payout ratio ranging from 60- 80% of underlying net profit, paid quarterly. This is not a surprise to us as Singtel’s dividend payout ratio is 60-75% of underlying net profit.

Investing for the future a must

SingPost recently also held its opening ceremony for its new regional eCommerce logistics hub at the Tampines Logistics Park, situated near the facilities of DHL and Kerry Logistics. At 553,000 sq ft, the S$182m facility houses a fully automated parcel sorting facility that can process up to 100k parcels a day; we understand that currently the group is handling more than 10k parcels a day. Companies in the sector are indeed investing for the future – in Oct this year, DHL Express also opened its S$140m South Asia hub (23,600sqm) at Changi Airfreight Centre with a fully automated express parcel sorting and processing system, allowing it to process 24k shipments and documents an hour.

Near term pain for longer term gain

As SingPost builds up its eCommerce logistics capabilities, investments will be required, driving up expenses in the near term. Time will also be required for productivity gains as SingPost builds up scale. Margins in the logistics space are lower than mail, and competition in eCommerce logistics has also been increasing. Meanwhile, we fine-tune our estimates and roll forward our valuations, such that our FV rises slightly from S$1.42 to S$1.47. Maintain HOLD.

Source: OCBC Research - 7 Nov 2016