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Analysis of SingPost

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On 29 December 2016, SingPost finally unveiled a new Chief Executive Officer (CEO) through appointment of Mr Paul William Coutts who was previously from Toll Global Forwarding, one of the five divisions in the Toll Group. On the basis of the 2Q2016 financial performance, the new CEO will have his work cut out for him. This article contains my analysis of SingPost.

Suffice to say, SingPost’s business model has been disrupted by digital technologies, which led to declining traditional letter mail volumes in recent years. 2Q2016 financial results revealed that SingPost is a company still “work-in-progress”. Underlying net profit for Q2 fell 27.9% which the company attributed to “transformational investments and challenges”. Total expenses increased by 23.7% due to higher expenses in the eCommerce business and costs related to the new Regional eCommerce Logistics Hub.

As SingPost embarks on its business transformation journey, the incoming CEO has an unenviable task of leading an institution that has faltered in recent years. While the company is still making profits, operating profits across all its business units declined by doubt digits compared to last year. Its eCommerce unit lost $6.8 million and $10.3 million in Q2 and H1.

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The eCommerce unit will likely to continue burning cash as SingPost seeks to enhance the eCommerce logistics capabilities to better serve the region growing online retail markets. A lot will also depend on whether the management is able to integrate and extract synergies from acquisitions made over the past few years.

Notably, there was an increase in short-term borrowings, which led to a net current liability position of S$239.1 million, compared to S$133.2 million as at 31 March 2016. The cash and short-term funds were largely utilised for residual expenditure on committed capex for construction of the SPC retail mall and Regional eCommerce Logistics Hub. The increased borrowings is essential to fuel future growth for SingPost but this has caused the balance sheet to appear slightly shaky.

Cash flow from operating activities was $21.3 million, an improvement from negative $37 million last year. Capital expenditure is expected to remain high in FY2016/17 from committed capital expenditure for the ongoing redevelopment of SPC retail mall. Thus, the investment from Alibaba Group would be very helpful in tiding SingPost over this critical phase of transformation. Infocommunications Media Development Authority has given approval for Alibaba to increase its interest in SingPost to 14.4 per cent, from 10.2 per cent currently. Alibaba’s further investment of S$187.1 million into SingPost is targeted to be completed by 28 February 2017.

Since IPO, SingPost has rewarded shareholders dividends amounting to 93.9 cents per share – compared to the IPO price of 60 cents per share. With this stellar dividend track record, SingPost is regarded as an attractive dividend stock to hold. However, SingPost recently revised its dividend policy recently from an absolute amount to one based on a pay-out ratio ranging between 60 per cent and 80 per cent of underlying net profit for each financial year. This move, while may be unpopular with dividend investors, is a strategy to retain fund for engineering future growth.

The redevelopment of the SPC retail mall is expected to be completed around mid-2017, and leasing for the mall has commenced. The Group continues to forgo rental income during this period of redevelopment. Once ready, the mall would provide a source of growth driver for struggling SingPost.

My past experiences had taught me that new leadership and change of business directions often create inherent business risks. In SingPost’s case, it remains to be seen whether the new CEO can successfully reverse the company’s declining fortune. Furthermore, the lack of operational experience in new business units like the eCommerce units means that SingPost will likely to continue losing money in this segment. For SingPost, this sort of growing pain is inevitable as it seeks to reinvent itself in this new digital economy.

2016 had been a nightmare for SingPost investors as the company seen a major overhaul of its top management. The Chairman stepped down while the CEO, CFO and COO all resigned within the span of one year. These abrupt changes led to concerns from investors and major shareholder, SingTel, has to intervene. SingTel chairman, Simon Israel, took over as SingPost chairman and swiftly implemented various policies to strengthen the corporate governance.

The execution risks arising from leadership changes aside, the decision by management to pivot itself in eCommerce logistics is a right business goal because SingPost can leverage on its postal network as a backbone for delivery capabilities. While domestic transactional mail continues to decline, in contrast, eCommerce packages delivered through the postal channel are increasing. The trend is particularly evident in the International Mail business, which has been a conduit for increasing cross-border eCommerce deliveries over the last few years

With so much uncertainties arising from the slew of changes, investing in SingPost may be risky for me. I will not even determine an entry price for this counter because of its hazy business outlook. Nonetheless, if the new CEO can successfully transform SingPost into an eCommerce logistic provider, this counter can be an exciting prospect. Till then, SingPost will still be an unfinished article.

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5 Comments

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  1. Given Alibaba’s entry price is higher than the current market price, my plan is to go with the big boys with a small position.

  2. Hi Sgwealthbuilder,

    Great analysis, I am positive about the repositioning of business towards eCommerce logistic. As you mentioned, integration of their acquisitions is one of the challenges this year. I might invest in Singpost with better clarify in the near future.

    Best,
    AT
    http://www.aniontrading.com

  3. Hi Bruce,

    Very interesting strategy. I didn’t thought of that!

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

  4. Given the huge volume of alibaba business and Lazada move and the timing is just right to have this bearish event and sentiment facing SP. This is an opportunity or risk that have been waited many years.

  5. Hi Calvin,

    I will be cautious with this counter given the change of management and the business disruptions.

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

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