CIMB recently published the below article explaining that its business as usual for Singpost amid CEO’s resignation and highlighted that at current price, Singpost is actually undervalued at current price of ~$1.53 versus DCF-based target price of S$2.04 (7% WACC).
DCF means discounted cash flow. Cash flow typically means free cash flow (operating cash flow minus capital expenditure). In Singpost 2H2015/16 financial statement, the operating cash flow is $22 million (1H 2015/16) and capital expenditure is $170 million. Total issued shares is 2,153,868,416. Assuming operating cash flow for 2015/2016 is 2x of 1H 2015/16, we have operating cash flow per share of $44 mil/2,153 mil shares = $0.02 per share versus capital expenditure of $0.08 per share. We will have negative free-cash for 2015/2016. However, for the sake of discussion, we assume this is once-off and use $0.02 as input for DCF analysis.
Assuming a simple single stage DCF model with the following equation:
Target Price = Cash per share / (WACC – Growth)
With a WACC of 7%, the growth expected is 6%. Is this too aggressive?
Lets check the earning profiles for Singpost from 2006 to 2007 from Morningstar:
| Year | EPS | Growth |
| 2006 | 0.06 | – |
| 2007 | 0.07 | 16.67% |
| 2008 | 0.08 | 14.29% |
| 2009 | 0.08 | 0.00% |
| 2010 | 0.09 | 12.50% |
| 2011 | 0.08 | -11.11% |
| 2012 | 0.07 | -12.50% |
| 2013 | 0.06 | -14.29% |
| 2014 | 0.07 | 16.67% |
| 2015 | 0.07 | 0.00% |
| TTM | 0.08 | 14.29% |
| Median | 6.25% | |
| CAGR | 3.25% |
The median YoY growth is 6.25% while compounded annual growth rate is 3.25%. If you feed in CAGR to the DCF model, your target price will be much lower at ~$0.53 while if 6.25% is used, it will be $2.67. This is a huge range. What we are trying to show is actually we feel that the inputs for a DCF model is highly subjective. Is the WACC too low? With global interest rate increasing, can the company get cheap debt? Is the cost of equity so low at 7%? We will be more comfortable with a higher discount rate of 10-12%. This will be more prudent for a typical investor. if you simply divide the target price by the operating cash, you will get P/OP Cash multiple of ~100!!!. Paying hundred times for free cash flow? Even at current price of $1.5, we are paying 75 times current operating cash flow. This kind of valuation seems very rich and maybe applicable to fast growth company. CAGR of 3.25% doesnt seems to be a growth rate for a fast growing company.
We expect the price of Singpost to be further depressed in near future if the growth initiative fails to shows results to justify their frothy valuation. The price need to decrease further to make it more attractive for an investor who is interested in the long term prospects of Singpost.
What are your views?
The Valumetrics Team
Source:
Singapore Post Ltd – Business As Usual Amid CEO’s Resignation
- SPOST’s share price has taken a plunge since Dr. Wolfgang Baier’s resignation as Group CEO, and concerns over corporate governance issues at SPOST.
- With key management at the individual business level still intact, we expect business as usual and no change in strategy despite the CEO’s departure.
- Maintain Add. In the medium term, we think a re-rating could be driven by the allaying of corporate governance concerns, and realisation of synergies from M&As.
Concern #1: Corporate Governance Issues
- SPOST has been flagged for corporate governance issues following the failure to disclose its independent director Mr. Tay’s interest in SPOST’s acquisitions of FS Mackenzie and Famous Pacific Shipping (NZ). The deals were arranged by Stirling Coleman Capital, of which Mr. Tay is non-executive Chairman and a shareholder.
- SPOST reported that Mr. Tay had abstained from voting in the FS Mackenzie deal, as was reflected in the Board minutes, though his interest in the transaction was omitted from the SGX filing due to administrative oversight. As the deals occurred amidst multiple changes in the Company Secretary role from 2013-15, we think it could have been a case of a slip up, rather than an intentional effort to withhold the information.
- Based on disclosure in its annual reports, we estimate that SPOST acquired F.S. Mackenzie at 16x P/E and Famous Pacific Shipping (NZ) at 3x P/E, assuming their actual NPAT contributions in FY15 were annualised. The forward P/E multiple would have been an estimated 9x and 6x respectively, based on SPOST’s average NPAT forecasts as stated in the annual report. We think these multiples are fair and in line with peers, and see no foul play in terms of inflating the transaction value.
Concern #2: What Happens After The CEO’s Resignation
- Prior to joining SPOST, Wolfgang was with McKinsey and a consultant for SPOST on its transformation plan. He was later appointed CEO. From our understanding, the transformation strategy came from the Board amid declining letter mail volumes. With the Board still in place and the Chairman overseeing the group’s direction, we think the transformation efforts have not come to a halt (i.e. no change in strategy).
- Key management at the individual business unit level is intact. We think business will not be interrupted with Wolfgang’s departure. Marcelo Wesseler, SP eCommerce’s CEO, has been spearheading expansion in the e-commerce business, and been relocated to the US to oversee the consolidation of TradeGlobal and Jagged Peak.
- Ms Goh Hui Ling, Deputy CEO of International Mail, has been with the company for over 20 years and remains the key relationship manager with Alibaba. Woo Keng Leong, CEO of Postal Services, is the longest serving top executive at 30 years and continues to drive the mail segment, which contributed 77% of FY15’s operating profit.
Maintain Add With Re-Rating Potential In The Medium Term
- Near-term, expectations of earnings pressure are not new, due to:
- loss of rental income from the redevelopment at SPC, and
- consolidation of TradeGlobal, which is still lossmaking.
- In the medium term, we expect a re-rating to be driven by:
- allaying of corporate governance concerns, and
- realisation of synergies from recent M&As.
- Maintain Add and DCF-based target price of S$2.04 (7% WACC). SPOST is trading at 20x forward P/E, the same multiple it traded at prior to the news of Alibaba’s initial 10.1% investment. It offers an attractive yield of 4.6%.
Valumetrics.co 
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