Singapore Post Ltd - Decent ops marred by unfortunate circumstances

Results missed on poorer US operations 
3QFY3/17 core net profit of S$31.4m (+16% qoq, -29% yoy) was a disappointment amid seasonally stronger volumes (Singles Day, Black Friday, Christmas). Revenue fell slightly short of expectations on lower contributions from the ecommerce segment, especially at TradeGlobal (TG). While operating profit at the postal/logistics segments performed in line/exceeded expectations, S$8.4m in operating losses at the ecommerce segment brought overall operating profit down to S$37.3m (-2% qoq, -32% yoy). 
 
Strong AliExpress volumes lifted international mail contributions 
Postal revenue grew 13% qoq and 10% yoy, lifted by higher international mail revenue (+24% qoq, +11% yoy) as SPOST handled more AliExpress shipments, helped by the Singles Day sales event. Postal operating margins rose slightly qoq to 26.9% (2QFY17: 26.2%) on better operating leverage, and operating profit rose 16% qoq to S$38.5m. SPOST continues to engage in conversations with Cainiao, Lazada and Redmart on future collaboration, and plans to increase outbound mail in addition to transshipments. 
 
Logistics saw strong qoq improvement 
We were pleasantly surprised by the improvement in logistics operating profit to S$8.8m, which grew 78% qoq. All businesses saw higher revenue, with overall logistics revenue up 11% qoq and 6% yoy. While startup costs at the new ecommerce logistics hub continue to hurt margins and operating profit was still down 27% yoy, SPOST managed to improve utilisation from 10% to 18% at the facility, partially helped by the peak period. 
 
TradeGlobal missed expectations; risk of impairment but not news 
TG was the key culprit for the group’s poor overall performance. It was expected to post positive profits but instead suffered losses due to: 1) high cost of seasonal fulfillment labour, 2) loss of a key client that filed for bankruptcy and 3) a client that insourced its freight operations. As TG is performing below its base case, it could face impairment in 4Q, which we had highlighted in an earlier note in Jul 2016. We expect cost pressures to ease following a restructuring of TG’s operations. Jagged Peak was profitable in 3Q. 
 
Maintain Add 
We continue to like SPOST for its growth potential in ecommerce logistics following its JV with Alibaba. It also has the potential to divest non-core assets (e.g. self-storage, retail mall). The stock trades at 21x forward P/E, an attractive level for earnings recovery in FY18 following the re-opening of the SPC retail mall in mid-2017. Maintain Add, with a lower DCF-based target price of S$1.62 (7% WACC) as we cut FY17-19 EPS by 6-10% for lower ecommerce profits. Key risk is fierce competition displacing SPOST’s volumes. 

Perennial Real Estate Holdings - Dragged by revaluations and impairment losses

FY16 results highlights  PREH posted FY16 net profit of S$35.1m, -39.6% yoy on a 6.4% dip in revenue to S$110.2m. Although full-year revenue was slightly ahead of our estimate, net profit was below largely due to impairments and revaluation losses taken for the Shenyang Red Star Macalline Furniture Mall and Eden Residences in Singapore, partly offset by revaluation surplus from the Perennial International Health and Medical Hub. Stripping out exceptionals, core net profit would have been S$0.3m, 37% of our forecast.    Singapore impacted by impairments and lower rental income  Singapore made up 54% of FY16 revenue and 16% of EBIT. Revenue fell 4.4% yoy due to lower rental income from TripleOne Somerset on lower occupancy after commencement of AEI. EBIT was adversely impacted by impairment provisions for Eden Singapore and revaluation deficit from Capitol Singapore. PREH recently monetised part of its stake in TripleOne Somerset to Shun Tak and this could create some income vacuum from FY17 onwards.      China earnings growth likely to be 2H loaded  In China, committed occupancy at the Perennial International Health and Medical Hub has crept up to 60% and is scheduled to be operational from 3Q17. In addition, one tower at Chengdu Plot D is expected to be handed over to Chengdu Xiehe Eldercare Home and is expected to commence operations in 3Q17. P1 is expected to have a capacity of 960 beds and pre-marketing activities for these homes have started.    Maintain Add  We think FY17 earnings would likely be back-end loaded with new contributions from Chengdu expected to be felt from 3Q17. Hence, we cut our FY17-18F EPS to factor in the reduced stake in TripleOne Somerset and push out the pace of contributions from Chengdu and Beijing projects as well as delay the sale of the remaining Eden Singapore units. Our RNAV falls to S$1.79, and our TP is cut to S$1.08 (a 40% discount to RNAV). Key risk is slower-than-expected roll-out of its property and healthcare business.