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Is SingPost a value trap?

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This post has been amended on 11 July 2016 to address errors made in the last sentences of the second and eighth paragraph.

Being the national postal service provider for the past 150 years, SingPost has transformed into a mail and e-Commerce technology giant within Singapore in recent years. Throughout the years, SingPost had consistently received numerous awards for its branding, innovation and business excellence. Its largest shareholders include SingTel and AliBaba Group. With such an impressive background, the past few months must have been a nightmare for SingPost, at least for its investors.

Crisis brewing for SingPost

Following a special audit in early May 2016, the Accounting and Corporate Regulatory Authority (Acra) is investigating SingPost for potential breaches of the Companies Act. The special audit was undertaken to look into the disclosure of a board member’s interest in the firm that advised on SingPost’s recent acquisitions.

One of the most damaging findings in the 52 page summary report was the lack of “prescribed policy, process or procedure for the evaluation and approval of Merger and Acquisitions transactions”. For an institution that won two ASEAN corporate governance awards in 2015, this is indeed an embarrassing audit finding. It exposes the weak corporate governance on disclosure by its board of directors.

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Investments

In light of this incident, the composition of the board committees was changed. Major shareholder, SingTel also stepped in and replaced SingPost chairman Mr Lim Ho Kee, with Mr Simon Israel. At this moment, SingPost is still looking for suitable candidate to replace group CEO Dr Wolfgang Baier, who resigned in December 2015. Its COO, Dr Sascha Hower also announced resignation on 21 June 2016. Amid the current mess the company is facing, will SingPost rise from the ashes?

Financial Performance

Despite the troubles, SingPost appears to be in good financial shape. For the latest full year financial results, revenue crossed the $1 billion milestone and net profits hit a record high of $248.9 million, boosted by one-off divestment gains. Notably, the financial report registered a net current liability of $133.2 million as at 31 March 2016 due to the acquisition of Trade Global. This increased the amount of borrowings, which increased from $238 million to $280 million year-on-year. However, cash flow from operating activities remained resilient at $202 million on full year basis.

The acquisition of Trade Global is needed as the Group continues its transformation into an e-Commerce logistics player. Trade Global is one of the top five e-Commerce end-to-end players in the United States and this deal would allow SingPost to expand its footprint in the international markets. However, it remains to be seen whether SingPost overpaid for it as the amount involved, $236 million, is substantial.

SingPost Investment Potential

One thing for sure is that Trade Global will not be SingPost’s final e-Commerce logistics acquisition. This is because SingPost has embarked on the transformation journey more than 10 years ago and is convinced that e-Commerce will fuel future growth for the company. Thus, its aggressive merger and acquisitions of technology companies in recent years. In fact, e-Commerce related revenue made up 35.8% of full year revenue, reflecting the importance of this segment to the growth of the company.

Due to changing lifestyle, SingPost will continue to face pressure in declining letter mails. Thus, the transformation for SingPost into an e-Commerce player is not an option. However, the transition will not be painful as SingPost can easily leverage on its existing network of branches, human resources and logistic facilities. Probably because of this, e-Commerce giant, Alibaba Group, saw the potential in SingPost and prompted it to invest in SingPost to become its major shareholder.

Dividend Track Record

Starting from financial year ending 31 March 2016, SingPost has enhanced its dividend policy. The company aims to pay-out a total annual dividend of 7 cents per share, to be paid on a quarterly basis. Including the final dividend pay-out of 2.5 cents for financial year ended 31 March 2016, total dividend for this FY2015/2016 amounts to 7 cents.

If you have been a shareholder of SingPost since 2003, then you would have collected a total dividend of $0.93 per share. This is because the Group has been consistently giving out dividends to shareholders through annual and special dividends. So clearly, this counter is a dividend play suitable for long-term investors.

In my point of view, the risk of SingPost being took-over by foreign competitors is low because mailing service is a strategic service in Singapore. Even though the mailing service industry has been liberalized since 2007, SingPost is still the designated Public Postal Licensee with access to letterbox master-door keys, the right to issue national stamps and the right to maintain our national postal code system.

It is also unlikely that the largest shareholder, SingTel, will privatize SingPost, given that there are no compelling reasons to do so. However, in the corporate world, nothing is impossible. So the jury is still out on whether SingPost will be de-listed from SGX mainboard. Not vested but will continue to monitor this counter.

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