Singapore Post Ltd - MANAGEMENT REPLY: How was market value of investments derived and where will it spend next?

22/2/2014 – Singapore Post (SingPost) says in its third quarter performance that it is "on track" with transformation efforts to develop its e-commerce and digital services capabilities in Asia.

Additional capital of S$100 mln has already been committed over the next three years beginning from FY13/14 to enhance postal infrastructure, service quality and operations.

Growth will be done through mergers and acquisitions and other organic means in Singapore and the region.

At the same time, cash conservation will be observed to support investment needs, capital expenditure and working capital.

The company just announced earnings for Q3FY13:

Revenue: +30.2% to S$222.6 mln
Profit: +0.7% to S$39.7 mln
Cash flow from operations: S$38.9 mln vs S$29.8 mln
Dividend: 1.873 cents per share vs 1.889 cents per share

As you can see, the topline shows a significant improvement, but profitability lagged because margins are thinner in some of its new businesses.

Here's the story:

Revenue increased to S$222.6 mln from S$171 mln because of growth in e-commerce related activities across the company's businesses, including contributions from acquisitions.

Minus acquisitions contributions, revenue increase was 9.3%.

Mail revenue climbed from S$118.1 mln to S$133.2 mln because of higher domestic and international e-commerce package volumes.

Logistics revenue increased from S$61.5 mln to S$101.2 mln from contributions from new acquisitions General Storage Company and Famous Holdings, and regional e-fulfilment activities.

Minus contributions from the two newly acquired companies, Logistics business growth was just 4.3%.

Retail & e-Commerce revenue dropped from S$24.1 mln to S$22.6 mln because of poorer contributions from agency services which offset increases in financial services and e-Commerce.

In other income, rental and property-related income climbed from S$11.1 mln to S$11.4 mln with growth in rental income of the company's properties.

A miscellaneous loss of S$0.8 mln was booked for the restructuring of an overseas operation, compared to S$2.5 mln earned in the corresponding period.

So, in all, a big rise in revenue.

But here come the costs: total expenses went up to S$184.4 mln from S$137.1 mln because of a change in business model to one of greater diversification and growth in lower margin businesses.

Volume-related expenses increased correspondingly in international traffic, higher conveyance costs and cost of goods sold, going from S$52.1 mln to S$89.2 mln.

Labour and related expenses also climbed from S$51.2 mln to S$58.3 mln because of additional hires for new subsidiaries.

Administrative and other expenses also climbed from S$19.7 mln to S$23.5 mln because of increases in rental and property-related expenses.

In operating profit, Mail inched forward by just 0.1%.

Logistics made the largest profit increase by climbing from S$4.6 mln to S$6.2 mln, because of the inclusion of contributions from the new subsidiaries, General Storage Company and Famous Holdings.

This was in spite of higher operational costs.

Retail and e-Commerce dipped from S$2.8 mln to S$2.6 mln because of lower contributions from agency services and developmental costs incurred for the e-Commerce business.

Share of results from associates and JVs grew from S$0.7 mln to S$1 mln with improved performance.

For cash flow, cash from operations increased 21% because of higher operating cash flow and working capital change.

In this third quarter, SingPost spent S$18.3 mln on property, plant and equipment, which is higher than S$7.9 mln spent in the corresponding quarter.

It also spent S$404.3 mln, up from S$110.3 mln previously, for repaying a S$300 mln bond and S$14.9 mln term loan, and for the issuance of ordinary shares and reissuance of treasury shares totalling S$10.7 mln.

The S$300 mln bond repayment was done in April 2013 utilising the company's cash reserves.

All up, total assets has decreased to S$1.29 bln from S$1.56 bln as at March 31, 2013.

Total liabilities, also decreased to S$596.5 mln from S$894.7 mln previously.

Debt as at December 31, 2013 is S$228 mln, of which S$14.5 mln is repayable within one year or less.

As at December 31, 2013, SingPost was in a net cash position of S$134.6 mln.

And SingPost's acquisition spree continues, with multiple announcements since Christmas last year.

Its biggest came since the close of the third quarter, when it acquired TRAS-Inter Co., Ltd in Yokohama, Japan on January 29, for JPY240 mln (S$3 mln), through its subsidiary, Famous Holdings Pte Ltd.

Famous Holdings purchased TRAS-Inter's president Eiji Hironaka's entire stake in TRAS-Inter, effectively making the company a SingPost subsidiary.

This transaction will be paid up entirely in cash and funded through the company's internal resources.

TRAS-Inter is a customs broker and freight forwarder (non-vessel operating common carrier) focusing on shipments going into and out of Japan.

The net asset value of TRAS-Inter based on the latest unaudited financial statements for the financial year ended 30 April 2013 is JPY11.9 mln (equivalent to about S$148,000) based on an exchange rate of JPY80 to S$1 as at 29 January 2014).

A day before, SingPost announced an equity interest increase in Clout Shoppe Pte Ltd.

SingPost purchased the remaining 2,500 ordinary shares, or 5% of Clout Shoppe, from Ms Soh San Hui, for cash S$64,000, funded by internal resources.

Clout Shoppe was previously known as SuperToken, having adopted its current name in 2011.

Its principal activities are e-Commerce specialising in the provision of online shopping platforms and services.

Net tangible asset value of acquired shares as at November 30, 2013, was S$72,837.

On January 24, SingPost also exercised an equity interest increase by buying 1,821,922 more ordinary shares in GD Express Carrier Berhad, bringing up ownership to 26.05%.

GD Express Carrier's shares are traded on Bursa Malaysia via the reinvestment of a cash dividend of RM1,611,855 (S$619,944 based on exchange rate of MYR2.60 to S$1).

The shares were purchased at MYR0.8847 (S$0.34) which represents a discount of 26.28% over GD's closing price of MYR1.20 as at January 24.

Incidentally, Singapore Post CEO, Dr Wolfgang Baier is a non-independent and non-executive director of GD Express Carrier, as described on the company's web site.

He was appointed to the position on September 12, 2012.

SingPost, on January 7, announced a joint venture with PT Rantai Bumi Laut for warehousing and freight services in Indonesia.

The new JV will be named "PT Quantium Solutions Logistics Indonesia" with an initial paid-up share capital of US$300,000 (S$375,000), based on the exchange rate of US$1 to S$1.25.

Quantium Solutions International will take a 49% subscription and the remaining 51% will be subscribed by PT Rantai Bumi Laut.

SingPost will fund this JV through internal resources.

A day prior, on January 6, SingPost announced its completed its investment in Shenzhen 4PX Information and Technology Co., Ltd.

Its subscription for an 18% stake in Shenzhen 4PX Information and Technology was completed with Shenzhen Shangcheng Investment Co., Ltd, Shenzhen Capital Group Co., Ltd, and Shenzhen Keying Investment Consultancy Co., Ltd.

As described on this web site, the company provides services such as logistics, software and consulting services.

Note how the description calls the company just "4PX Express", as opposed to Shenzhen 4PX Information and Technology, although SingPost and Shenzhen Capital Group are named as major investors.

Just after Christmas last year on December 26, SingPost, through indirect subsidiary Collective Developers, purchased Axis Plaza from Axis Real Estate Investment Trust, with RHB Trustees Berhad acting as trustee.

Axis Plaza is located at No.5 Jalan Penyair U1/44, Off Jalan Glenmarie, Temasya Industrial Park, 40150 Shah Alam, Selangor Darul Ehsan, Malaysia.

Valuation of Axis Plaza as at November 26, 2013 was MYR37 mln (S$14.3 mln), conducted by KGV International Property Consultants (M) Sdn Bhd.

SingPost paid MYR37 mln, or about S$14.3 mln, funded by internal resources and bank borrowings which have been specifically arranged for this acquisition.

Payment terms were for a 10% deposit where the remaining 90% of the amount is to be paid within the completion period of the agreement.

Before Christmas on December 20, 2013, SingPost’s indirect wholly-owned subsidiary General Storage Company bought Collective Developers Sdn Bhd for MYR2.

Shairah Begum binti Kadar Bashah and Fatimah binti Sulaiman sold their equity control of two ordinary shares for MYR1 each.

Collective Developers has authorised share capital of MYR400,000 (S$154,000).

With this transaction, Collective Developers effectively becomes an indirect wholly-owned subsidiary of SingPost.

Principal activities of Collective Developers are general trading and investment holding.

In total, SingPost's investment costs have exceeded 10% of its latest unaudited consolidated net tangible assets as at March 31, 2013.

The aggregate cost of the Group's quoted investments moved up from S$42 mln to S$49 mln, representing a shift from 8.86% to 10.34% of its consolidated net tangible assets.

Total market value of investments has increased from S$106.6 mln to S$113.6 mln.

Mergers and acquisitions aside, SingPost's EVP Retail and Financial Services, Mr Loh Choo Beng, is exiting his post effective March 31, 2014.

Mr Loh has held his position since October 1, 2007, and he owns 1,291,000 SingPost ordinary shares.

He previously was a director at the Intellectual Property Office in Singapore (IPOS) and SingPost Retail Services Pte Ltd.

The announcement indicated his reason for leaving as to "pursue other career opportunities".

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. How was market value of investments derived, and where will it spend next?

Looking at the announcement about investments exceeding 10% of net tangible assets, we cannot help but wonder:

Who is doing the valuation of these assets?

How are they arriving at their numbers?

What will the next targets be given the S$100 mln already set aside for investment expenditure?

Management Reply:The investments in the announcements refer to bonds which are part of the company’s cash management strategy.
As regards the S$100 million investment, this is for the improvement of overall service quality and includes upgrading of infrastructure and technology as well as processes. About 60% of this investment is towards the upgrade of postal infrastructure including the integrated sorting machines and post office modernisation.

Question

2. What are the plans for Axis Plaza?

Is this just part of a property portfolio expansion plan or will there be plans for postal and fulfilment services out of this location?

Axis Plaza is a freehold office/industrial property of 16 years with a net lettable area of 10,592 sq m, located within the Temasya Industrial Park, which is near the Glenmarie Industrial Park.

Will leases be increased as a result of this acquisition?

Are there plans to change the tenants mix?

Management Reply:The property is to support the Group’s regional expansion and will be used for our Logistics business as well as our self-storage business.

(Total number of questions in the full story: 7)

We thank management for their reply.

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