Wednesday, July 08, 2015

Singapore Post Ltd - Overhang removed with JV

What Happened 
SPOST has entered into a conditional JV agreement with Alibaba, using SPOST’s wholly-owned subsidiary, Quantium Solutions (QS) as the vehicle for the JV. Alibaba will pay S$91.7m for a 34% stake in QS, while SPOST will retain the remaining 66% stake. SPOST also plans to issue 107.6m new ordinary shares at S$1.74/share (7.89% discount to the VWAP of S$1.889 on 7 Jul) to Alibaba, which will increase Alibaba’s stake in SPOST from 10.23% to 14.51% post-issuance. The net proceeds of S$183.6m will be used for expansion in e-commerce logistics (75%) and for general working capital (25%). 

What We Think
At S$91.7m, we estimate that Alibaba will pay 28x P/E for the 34% stake in QS. We view this positively as it establishes a floor for SPOST’s valuation. However, losing a 34% stake in its e-commerce logistics engine (QS) will likely lead to mild earnings dilution in the near term, and we cut our FY16 core net profit growth forecast to -2% (+5% previously). That said, the earnings shortfall can be mitigated with M&As using the S$229m proceeds (net of working capital). While we view the JV as a positive, we do not expect immediate volume growth as the biggest volumes are still in transhipments into/out of China, which SPOST already engages in. Within ASEAN, Indonesia is likely to be the key growth market, but infrastructure issues are likely to plague e-commerce growth in the near term. We are more positive on the medium-term impact, when SPOST capitalises on Alibaba’s volumes as they expand across Asia Pacific, which will lower the cost per parcel in a winner-takes-all market. 

What You Should Do
Upgrade to Add. Upon announcement of the JV, we believe that the biggest uncertainty on the stock has been removed. Though earnings growth may only accelerate in the medium term, investors are paid to wait with a 3.7% yield. 

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