Maybank is initiating coverage on postal service provider Singapore Post (SingPost) at a “sell” rating with a price target of $1.29.
SingPost, an associate company of Singapore Telecommunications, is currently trading at “peak valuations” as potential for further negative newsflow has yet to be priced in, says analyst John Cheong in a Monday report.
He believes investors are “too optimistic” for the following reasons:
1. SingPost’s M&As face a long gestation period
The company embarked on its mergers and acquisitions (M&As) in 2011 in a bid to evolve from its domestic-mail monopoly into an international e-commerce logistics provider. On this, Cheong notes that even with SingPost’s current provision of various e-commerce logistics services in the Asia Pacific, most of its acquisitions have “not added much” to synergies or earnings. He adds that SingPost’s acquired businesses are “small players” face intense competition in their fields. “More investments would be needed for its customer acquisitions and scale economies,” Cheong reckons.
2. Alibaba’s second investment deal may be under threat
Alibaba, SingPost’s 10.2% stakeholder, has extended its long-stop date for its second investment in SingPost thrice. Cheong comments that the transaction is taking “much longer” than the companies’ first share transaction in 2014. As such, Cheong highlights there may be risks of the deal not following through, as there is the possibility that Alibaba may choose to expand its Asean logistics capability in-house using Lazada’s logistics network instead.
(See: "Has SingPost-Alibaba JV hit a snag?")
3. Inability to resolve corporate-governance conundrum
After former CEO Wolfgang Baier’s resignation 2015, it has been revealed that one of the company’s directors had not declared his interest in a previous acquisition. The group has since seen its chairman and two directors step down, while Baier’s position remains unfilled. Furthermore, with the impending results of a corporate-governance review by Hendrick & Struggles next month and possibly more investigations into breaches of the Companies Act by ACRA since it began looking into SingPost’s activities last month, Cheong thinks the “air may not clear in the long term”.
(See: "SingPost group CEO Wolfgang Baier resigns")
(See: "Keith Tay steps down at SingPost’s nominations committee")
For now, Cheong expects SingPost’s dominant mail business, which he points out is “highly cash-generative but declining” to provide support before its e-commerce logistics arm begins to compensate.
http://smr.theedgemarkets.com/article/why-singpost-investors-will-see-‘pain-gain’-maybank
