SingPost and Alibaba are still in the initial stages of exploring areas of collaboration

1QFY15 results in line
Singapore Post (SingPost) reported a 4.8% YoY rise in revenue to S$210.9m and a 5.1% increase in net profit to S$39.2m in 1QFY15. Excluding one-off items, underlying net profit was S$36.2m, accounting for 24% of our full year estimate. Mail revenue rose 7.4% in the quarter on the back of growth in ecommerce related transhipment business and higher one-off corporate postings relating to the Personal Data Protection Act which came into effect in Jul 2014. Logistics revenue grew 4.1% while the retail and eCommerce division saw a 9.7% growth. However, margins continued to be pressured due to higher operating costs.

Moving fast but also taking prudent steps
No shipments attributed to Alibaba contributed to results in 1QFY15, and management emphasized that both SingPost and Alibaba are still in the initial stages of exploring areas of collaboration. Currently, both parties are in negotiations for a joint venture to create an international ecommerce logistics platform. SingPost is in its fourth year of its transformation programme, and with the support of Alibaba, the group can and may even be pressured to accelerate the building of its logistics infrastructure in the region. However, management understands the need to take prudent steps in the interest of shareholders.

Maintain HOLD
The transformation of SingPost holds great promise for the group but time is still needed for it to fill in the missing infrastructure pieces for this region. It is also hard to quantify the near-term returns on its acquisitions and investments (also with logistics being a low margin business), though they are certainly required for SingPost to become a leading e-Commerce logistics player. Still, we now impute growth assumptions of 20-35% for the logistics revenue side of the business from FY16, and based on a threestage DCF model with a higher terminal value growth assumption of 3.0% and cost of equity assumption of 6.9%, we raise our fair value estimate for the stock to S$1.71. This implies a 27x FY15F P/E and 25x FY16F P/E, higher than the ~23x P/E that listed logistics players like Kerry Logistics and Fedex command, but lower than the ~28-30x P/Es of e-Commerce players like Start Today and Rakuten have. Maintain HOLD.

What the Alibaba deal means for SingPost

Both companies earlier signed an MOU to allow them to
discuss and negotiate a JV in the business of international e-commerce logistics. As mentioned in our earlier report, from SingPost’s point of view, besides the creation of new relationships and opportunities for strategic cooperation with Alibaba, this move will allow it to benefit from Alibaba’s expertise in e-commerce and business volumes. In particular, priority will be given to SingPost’s logistics services (e.g. when Alibaba needs to ship goods to certain parts in SE Asia) based on commercial terms. SingPost will also have to step up on its investment efforts to achieve the full regional value chain of ecommerce logistics that is able to handle Alibaba’s volumes. By obtaining access to more of Alibaba’s volumes, SingPost would be able to obtain a scale effect and bring down cost per unit of good handled, though it is hard to quantify the near-term impact given the lack of details so far.