Here's one reason to stay bullish on Singapore Post despite corporate governance woes

Over $600m global investments since 2011 will finally bear fruit.

Singapore Post’s (SPOST) gradual transformation into a global e-commerce logistics provider has been largely written off in its valuation, which has seen more than S$1.4b in market capitalisation wiped out from its peak since early-15, said RHB.

According to the research firm, based on yesterday’s closing share price of S$1.47/share, the value of core traditional mail business and property segment would altogether make up approximately 98% of current market cap of SPOST, which suggests that the growth assets in logistics and ecommerce ventures are undervalued.

RHB noted that they are cognisant that there remain uncertainties on SPOST, particularly with regard to the Alibaba second tranche investments, CEO change as well as lingering corporate governance concerns and kitchen sinking in FY17. In addition, it sees a potential for dividend cuts, as the group may adopt a dividend policy payout to align dividends with earnings.

Nevertheless, RHB believes that what investors can look forward to in the next 12 months will be the appointment of a new CEO, initiatives by its new chairman and directors to improve corporate governance, as well as a focus on integrating the new acquisitions.

"While there have been changes in the CEO and composition of the board of directors, one constant is the group’s commitment to transforming itself into a globally-recognised e-commerce logistics provider," it said.

Since 2011, the group has invested over S$600m in its transformation process, including the pivotal acquisitions of TradeGlobal and Jagged Peak in 2015.

"In our view, its investments and transformation since 2011 would provide a platform for a conservative three-year net profit CAGR of 8.5%, underpinned by its logistics and e-commerce segments," it explained.

In the absence of any more major new investments, RHB expects its capex and investments to have peaked in FY16, and for its free cash flow to rise from S$169m (7.8 S cents/share) in FY17 to S$215m (10 S cents/share) in FY19.

"Assuming an earnings-linked dividend policy, our sensitivity analysis indicates a payout of 50-90% would indicate an annual dividend of 4.2-6.3 S cents, based on FY17F EPS of 7.0 S cents. While we continue to retain our assumption of an absolute dividend of 7.0 S cents p.a., pending management guidance, we believe a likely scenario could be in the spectrum of a 50-90% dividend payout," it said.