Will SingPost turn the tide?

When Simon Israel took over as SingPost’s Chairman in May this year, investors must be wondering whether SingPost will turn the tide. The group recently announced a set of disappointing 2Q16 results that saw net profit plunging 27.9% due to “transformational investments”.

Mr Israel, who is also the Chairman of SingTel, has been tasked to review the corporate governance and appoint a new CEO for SingPost. SingTel is the major shareholder of SingPost and currently holds 22.85% stake in the national postal service provider.

There was a leadership crisis in SingPost earlier this year and SingTel intervened after the exit of almost all of the top management. Even Chairman-designate Professor Low Teck Seng declined the offer to chair SingPost’s board, claiming that the “role is too demanding”.

Judging by the recent financial results, Mr Israel certainly needs to accelerate the search for the new CEO so as to set strategic directions and lead the management team. Currently, Mr Mervyn Lim is the Covering Group Chief Executive Officer. Since the exodus of the previous management team, SingPost share price has declined steadily from $1.69 to a low of $1.37. The share price only starts to show sign of stability recently and currently hovers at $1.50.

To be fair to Mr Israel, it is not easy to implement reforms in an old institution like SingPost. Although SingTel is the major shareholder of SingPost, it does not necessarily means that both companies share the same culture. Thus, one of the sweeping changes that Mr Israel introduced was the capping of board tenure at nine years, similar to parent company SingTel. More changes may be on the card but it is important to note that Mr Israel cannot achieve much alone.

Thus, a new CEO is sorely needed. This is especially so given that SingPost is in the transition period of re-inventing its business model.

Perhaps the significant change that really turn off investors is the new dividend policy which is revised from an absolute amount to one based on a pay-out ratio ranging between 60 per cent and 80 percent of underlying net profit for each financial year. The board of directors hope that in setting the new policy, the dividends will be sustainable and to be paid out of underlying earnings.

Long-term investors of SingPost will be riled by the latest change made to the dividend policy as many Singapore investors were attracted by its rich history of dividends. In fact, investors who hold SingPost shares since 2002 would have received $0.93 per share worth of dividends, making SingPost shares one of the most shining dividend stocks in the SGX market. The appealing aspect of investing in SingPost was that the dividend was very predictable for many years and this gave dividend investors a sense of certainty. With the recent change, SingPost’s appeal as a dividend stock may decline considerably among stock investors.

SingPost’s domestic mail business continues to be disrupted by technologies and latest earning report revealed that its postal segment business remains challenging. As of 30 September, the group was in a net debt position of $284.4 million. Total borrowings increased from S$280.3 million as at 31 March to S$406.4 million as at 30 September due to the construction of the SPC retail mall and Regional eCommerce Logistics Hub.

Apart from the shaky balance sheet, the bigger concern should be the significant decline in the operating profits across all segments. Excluding the one-off gains, operating profit decreased by 30.5% and 16.9% in the second quarter and first half over the corresponding periods last year. Even though SingPost is in the midst of re-engineering its business model in this new economy, this is not a valid reason for this poor quarter financial performance.

Its e-commerce segment continue to bleed money, registering a whopping losses of $10.3 million in the 1H17, a 150% decline compared to previous half-year. Will its US investments in TradeGlobal and Jagged Peak turn out to be major flops? The jury is still out but the management has a mammoth task in extracting synergies from these acquisitions and making profits out of them.

To be frank, it is still a mystery to me that SingPost is able to secure investment from Alibaba. After all, Singapore market is so small and Alibaba would be better off scaling its online market businesses in big countries like Indonesia and China. Nevertheless, SingPost recently announced that the authority has granted approval for Alibaba to increase its interest in SingPost to 14.4%, from 10.2%. Alibaba’s further investment of S$187.1 million into SingPost is targeted to be completed by 28 February 2017. The funding would definitely help to boost the investments funds needed for transforming SingPost into a digital player and growing its current stable of subsidiaries.

Not all business turnarounds can be successful but many investors tend to be attracted to companies taking on new business models. For some unknown reasons, many people tend to believe business changes would bring about positive impacts and ignore the risks. In the case of SingPost, the outlook is murky and whether the group can navigate through the storm will depend very much on management’s execution in the coming years. But then again, without a new CEO in sight, there is too much uncertainty for me to enter this counter. I will not enter this counter unless the price drop drastically to $0.20.

In conclusion, I am convinced SingPost will turn the corner but patience is needed. Investors should not expect miracles to happen within the short term.

Do you invest in SingPost shares? What are your thoughts and comments on this article? Feel free to share your comments in this blog. Alternatively, if you wish me to analyse another SGX stock, please contact me at sgwealthbuilder@gmail.com.

Magically yours,

SG Wealth Builder