FY14F PE (x): 19.6
FY15F PE (x): 18.3
SINGAPORE Post (SingPost) reported strong 9M FY2014 revenue growth as expected on the back of M&A consolidations and growth in international mail and regional e-fulfilment. Mail revenue benefited from an increase in e-commerce package volumes, while the logistics division recognised three full quarters of contribution from Famous Holdings and Lock+Store.
Ebit margin declined to 23 per cent from 30 per cent previously, due to the change in cost structure, ongoing developmental expenses and growth in the lower-margin logistics business.
E-commerce solutions are driving the group's performance as traditional mail continues to decline. We estimate 35-40 per cent of the group's activities are related to e-commerce, which is leveraged on SingPost's regional presence and end-to-end capabilities.
While developmental spending will continue to be a drag in the near term, we think the group is making notable progress in its transformation strategy.
Within the mail division, international mail leads with a 27 per cent y-o-y growth in 9M FY2014. Contribution from non-mail businesses has reached 46 per cent from only 36 per cent a year ago.
In addition, the group was able to bring in major brands such as Canon, Philips and Toshiba onto its e-commerce platform, expanding its customer portfolio of over 200 names.
Mail service upgrade is underway, to improve capacity and efficiencies by end-2014. SingPost will be installing its new integrated sorting machines costing S$45 million later this month. This is part of its S$100 million three-year investment plan to enhance staff inclusivity, productivity and service quality. When fully operational, the machines are expected to boost sorting capacity by 17 per cent and automation rate to 95 per cent.
We view the group's efforts to continually innovate positively, as mail will continue to generate the bulk of the group's cash flow while the other divisions incur integration and developmental costs. This will sustain its annual distribution to shareholders.
Maintain "buy" with a revised target price of S$1.50 (previously S$1.53), based on a three-stage DCF (discounted cashflow) model. The implied FY2015 PE is 20.8 times, which is within the stock's historical PE range of 8.3-21.8 times since 2004.
We see a modest re-rating for SingPost to be justified given its venture into end-to-end e-commerce solutions.
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