Singapore Post Ltd - Synergies showing up in ecommerce revenue

Profit missed on higher costs and investments at SP Commerce 
4Q revenue grew 28% yoy to S$318m but core net profit fell 20% yoy to S$31.8m. This was partially due to the loss of rental income from SPC retail mall and hybrid mail contributions (divested in 1H16), which we had factored in. We were surprised by 1) higher volume-related expenses (+59% yoy) from larger ecommerce volumes, 2) higher admin expenses (+24% yoy) from warehouse rentals and M&A expenses and 3) investments in front-end ecommerce infrastructure at SP Commerce. 

Logistics was decent; losses for retail & ecommerce 
Logistics revenue grew by 3% qoq, impressive after a seasonally strong 3Q. However, logistics operating profit fell by 5% qoq on less operating leverage vs. the peak shopping season in 3Q. Mail revenue fell by 2% qoq and operating profit fell 10% qoq as growth came from lower-margin transshipments while business mail volume fell 3%. The big miss came from retail & ecommerce; though TradeGlobal and Jagged Peak are profitable, investments in front-end infrastructure resulted in operating losses of S$3.2m. 

Gaining traction in ecommerce, now 42% of 4QFY16 revenue 
eCommerce-related revenue grew 5% qoq to S$134m, and made up 42% of 4Q revenue (3Q: 40%). Growth came from the logistics and retail & ecommerce segments, which we think reflects the momentum in realising synergies from TradeGlobal and Jagged Peak. In Mar, SPOST rolled out end-to-end services for Jagged Peak’s client, Nestle, in Singapore. This is currently for one product line, which we think could be Nespresso, with opportunities to handle more products in the future. 

Net debt but could return to net cash; DPS reaffirmed at 7 Scts 
A final DPS of 2.5 Scts was declared, bringing total DPS to 7 Scts. Management reaffirmed its commitment to maintain DPS at 7 Scts, barring unforeseen circumstances. SPOST ended FY16 with a net debt position of S$154m, a slight improvement from S$176m in 3Q. We think it could return to net cash when its JV agreement and 5% share issuance to Alibaba come through, which would raise S$91.7m and S$187.1m, respectively. The long-stop dates for both have been extended from 31 May to 31 Oct. 

Maintain Add 
We maintain an Add call on SPOST, with a lower DCF-based target price of S$1.76 (7% WACC) as we roll forward to FY17 and cut FY17-18F EPS by 2-3% to factor in higher expenses. In the short term, we think the share price could react positively to the overhaul of corporate governance policies and procedures, and the appointment of a new CEO. In the longer term, we expect earnings to re-rate on opportunities for collaboration with Alibaba ‐ both in transshipments and through the potential JV.