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Horror show of SingPost shares

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SingPost shares took a hit as the company announced a stunning quarter loss of $65.2 million. The loss came about after SingPost decided to write off $185 million for the ill-fated TradeGlobal, S$20.5 million for Postea Inc., and S$9.3 million for an industrial property at 3B Toh Guan Road East.

The latest setback for Singapore’s postal service provider came at a time of transformation for the 150 years old institution. As more and more companies switch to electronic statements, SingPost is transforming its business to eCommerce logistic. At the centre of the storm was the significant impairment of TradeGlobal, which was only acquired by SingPost less than two years ago.

Many investors were shocked that SingPost decided to write off its investment in TradeGlobal so soon. Two years are considered a relatively short time frame to judge a company’s potential growth. One plausible factor could be that the management is not convinced of a turnaround for TradeGlobal and hence, made the decision to cut losses early. It was reported that instead of a projected profit of S$9.4 million for FY16/17, TradeGlobal incurred a significant loss of S$25.8 million.

Given the extent of the impairment to SingPost’s investment in TradeGlobal, SingPost also appointed FTI Consulting, an independent global business advisory firm, which has verified that the impairment provision was properly calculated following an appropriate review process and that the assumptions adopted were reasonable.

SingPost

Following the failed investment in TradeGlobal, investors might be questioning SingPost’s ability to transform itself into an eCommerce player. Make no mistake, when it comes to technology companies, there is always a high risk of failing. Out of ten companies, seven or eight would fail. To win the game, SingPost must push on and continue to invest in technology companies which are aligned to its business model. But most importantly, SingPost must learn the lessons from the failed project in TradeGlobal.

Excluding the one-off write-off items, the underlying net profit for the quarter would have been $21.3 million, bringing the full year underlying net profit to $115 million. The results reflected some hard lessons for SingPost. Firstly, even barring the impairment charges, the underlying full year net profit would be a decline of 25% year-on-year. The decline was due to management’s failure to rein in total expenses, which increased 22.5% year-on-year.  The increased in expenses more than off-set the increased in total revenue. Higher expenses were due to inclusion of new subsidiaries and related expenses due to additional headcount.

Secondly, SingPost must expedite its business transformation as domestic mail revenue for the year continued to slide due to more companies switching to electronic statements. Full year revenue from its postal arm grew 1.5% to $544 million, with growth in International mail revenue offsetting decline in domestic mail revenue. In comparison, revenue from its eCommerce arm grew 171% to $267 million, notwithstanding the operating losses from TradeGlobal. This data illustrated the growth potential of the eCommerce for SingPost.

To develop the eCommerce segment, SingPost have partnered with Alibaba to drive volumes on its commercial logistics network. Efforts are also underway to expand the customer base, and develop collaborations and alliances with strategic partners to further increase volumes and economies of scale. Suffice to say, it will take time for these initiatives to translate materially into earnings.

Capital expenditure continued to be substantial for the full year, at $199.8 million due to the construction of the Regional eCommerce Logistics Hub and SPC retail mall.  The capital expenditure wiped out most of the net cash generated from operating activities. This resulted in free cash flow of merely $0.3 million. Nonetheless, this was a marked improvement from negative free cash flow of $148 million last year.

As at 31 March 2017, SingPost’s cash and cash equivalents stood at S$366.6 million, up from S$126.6 million as at 31 March 2016. The Group recorded a net cash position of S$2.6 million. The cash injections from Alibaba proved to be useful as SingPost returned to net cash position.

Capital expenditure for FY2017/18 is expected to be lower than FY2016/17, as the majority of development projects had been completed. With lower capital expenditure, free cash flow is expected to improve in FY2017/18. Thus, SingPost should have sufficient free cash to acquire more strategic eCommerce companies to fuel growth in the coming two years.

Indeed, the past two years had been a revelation for SingPost investors as the company underwent a dramatic management upheaval. The CEO, CFO and COO all resigned within the span of one year. Ex-chairman, Lim Ho Kee also stepped down last year. Amid the chaotic situation, SingTel Chairman intervened and took on the position of the new Chairman. After one year of searching, Paul William Coutts was finally appointed as the new CEO.

Read my other blog articles on SingPost:

  1. Analysis of SingPost
  2. Will SingPost turn the tide?
  3. Is SingPost a value trap?

It is still early days to judge the performance of the new CEO but many analysts deemed the significant impairment charges as paving the way for him to implement his ideas. It is common practice for companies to write off worthless investments made by previous management to allow the incoming CEO to make fresh changes. However, judging by the latest financial results, the new SingPost CEO has his work cut out for him.

Share price plunged to 4 year-low as news of the quarter loss hit the news before recovering lately. Clearly investors’ confidence was shaken. To make things worse, one of the things that the new Chairman, Simon Israel instituted was changing the dividend policy from an absolute amount to a ratio pay-out between 60 percent to 80 percent of the underlying net profit for each financial year.

Because of this revision, SingPost has announced final dividend of 0.5 cent per ordinary share (tax exempt one-tier). This would bring the annual dividend for the financial year to 3.5 cents per share, representing a payout ratio of 66 per cent of underlying net profit. The proposed final dividend is subject to shareholders’ approval at the Annual General Meeting in July 2017.

SingPost is a company which I have always admired because of its competitive advantage in its postal network and ability to provide low-cost cross-border shipment. But the increased risks arising from the change in management and business model make me cautious in investing in this counter.

The major change in the dividend policy inadvertently also caused SingPost to be less appealing to me from the perspective of a dividend investor. In terms of upside potential, it is unlikely that SingPost can transform itself into a regional eCommerce player in the short-term. There are also numerous uncertainties pertaining to the successful execution of the various growth initiatives.

Hence, this counter might be a potential value trap. Given the hazy outlook, I would avoid investing in SingPost, at least for the next 5 years.

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