Monday, January 11, 2016

Singapore Post Ltd - Business as usual amid CEO’s resignation

Concern #1: Corporate governance issues 
  SPOST has been flagged for corporate governance issues following the failure to disclose its independent director Mr. Tay’s interest in SPOST’s acquisitions of FS Mackenzie and Famous Pacific Shipping (NZ). The deals were arranged by Stirling Coleman Capital, of which Mr. Tay is non-executive Chairman and a shareholder.
  SPOST reported that Mr. Tay had abstained from voting in the FS Mackenzie deal, as was reflected in the Board minutes, though his interest in the transaction was omitted from the SGX filing due to administrative oversight. As the deals occurred amidst multiple changes in the Company Secretary role from 2013-15, we think it could have been a case of a slip up, rather than an intentional effort to withhold the information.
  Based on disclosure in its annual reports, we estimate that SPOST acquired F.S. Mackenzie at 16x P/E and Famous Pacific Shipping (NZ) at 3x P/E, assuming their actual NPAT contributions in FY15 were annualised. The forward P/E multiple would have been an estimated 9x and 6x respectively, based on SPOST’s average NPAT forecasts as stated in the annual report. We think these multiples are fair and in line with peers, and see no foul play in terms of inflating the transaction value. 

Concern #2: What happens after the CEO’s resignation
  Prior to joining SPOST, Wolfgang was with McKinsey and a consultant for SPOST on its transformation plan. He was later appointed CEO. From our understanding, the transformation strategy came from the Board amid declining letter mail volumes. With the Board still in place and the Chairman overseeing the group’s direction, we think the transformation efforts have not come to a halt (i.e. no change in strategy).
  Key management at the individual business unit level is intact. We think business will not be interrupted with Wolfgang’s departure. Marcelo Wesseler, SP eCommerce’s CEO, has been spearheading expansion in the ecommerce business, and been relocated to the US to oversee the consolidation of TradeGlobal and Jagged Peak.
  Ms Goh Hui Ling, Deputy CEO of International Mail, has been with the company for over 20 years and remains the key relationship manager with Alibaba. Woo Keng Leong, CEO of Postal Services, is the longest serving top executive at 30 years and continues to drive the mail segment, which contributed 77% of FY15’s operating profit. 

Maintain Add with re-rating potential in the medium term
  Near-term, expectations of earnings pressure are not new, due to: 1) loss of rental income from the redevelopment at SPC, and 2) consolidation of TradeGlobal, which is still lossmaking. In the medium term, we expect a re-rating to be driven by: 1) allaying of corporate governance concerns, and 2) realisation of synergies from recent M&As.
  Maintain Add and DCF-based target price of S$2.04 (7% WACC). SPOST is trading at 20x forward P/E, the same multiple it traded at prior to the news of Alibaba’s initial 10.1% investment. It offers an attractive yield of 4.6%. 

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