Wolf Money(SingPost Ltd)situational play
I bought the share in the company many years ago and I have not looked at the stock for close to 10 years. Here I am, back again looking at this fallen angel. I bought a position in our national postal service. To my own surprise, I didn’t see this coming. The 166 years company used to be one of the favourite among dividend investors but falling prospects, some “not so smart” acquisitions and dividend cuts caused the company to fall out of investors’ radar. SingPost was trading above $2 in 2015. Given their dominance in the Singapore market, it is astonishing to find its share price languishing at such a sorry state.
I am taking a bet on their restructuring review. There are many scenarios on how the value unlocking can turn out. I went undercover at SingPost, so you don’t have to.
1.) Selling SingPost Centre for more than a billion dollars. The current value of the centre at $1.1b is more than SingPost $970m market cap.
2.) Negotiating a deal with the government for tax payers to carry the unprofitable local snail mail business. The local mail business suffered a $16m loss at the last financial year. Part of the discussion may involve how SingPost could evolve into a business model with less reliance on physical post offices, thus freeing up valuable real estate for sale. Less people are sending out letter and post offices had seen better days.
3.) A sale of their Australian business through a private placement or an initial public offer. I estimate SingPost has invested more than AUD$ 800m into the Aussie business.
4.) Sale of non-core business. Famous Holdings was identified as a non-core asset. This business is worth more than $100m based on SingPost purchased price. Given the stronger shipping rates. This particular business might be a much easier sale as compared to other non-core assets.
The review will be out by end of the year or maybe earlier. Any of the 4 options will likely affect the share price positively to various degree, but there are downsides to the first two options in the longer run.
Option 1 will damage SingPost long term earnings if there is an outright sale of SingPost centre as rental income is an important contributor to the group’s overall profit. Furthermore, most of the buyers of shopping mall asset are REITs which are now handling their own high debt obligations. Very few REITs or companies have debt headroom to undertake such a huge property purchase. Asset securitisation is difficult in this current high interest rate environment. Then again, if they are desperate enough, the mega complex will be sold.
Option 2 attract public criticism of private profit, public loss conundrum.
Option 3 is the safest for extracting value among the 4 options. How much is the Australian business? No idea 🤷♂️ Based on press releases, the Australian logistics business is generating more than 1b revenue and $67m operating profit in last financial year.
Option 4 represents a low lying fruit for divestment. It might be the strongest candidate for divestment among the 4 options.
Major support can be seen at 37c and 41c. Downside risk included SingPost sitting on their laurels doing nothing to improve shareholders’ value after the review. They have been telling the market about their shareholders’ value unlocking exercise for years and review after review, nothing major was done. I believe given SingTel’s CEO has been pushing for its own value enhancement exercise. Being a 22% shareholders of SingPost, SingTel will likely encourage any form of value creation at SingPost to meet their own shareholders value unlocking goals. There is a likely conclusion by end of this year. I hope they are fast enough if they want to divest assets as the relatively good market doesn’t last forever.
SingPost profitability has improved over the last couple of years. Based on the current Q1 run rate, earnings should fall within the $100m operating profit range this year. They are trading slightly below 12.5x forward p/e. They have a dividend payout ratio of between 30% to 50%.
To be honest, SingPost past corporate restructurings were poor. Total shareholders’ return has been negative over the past 10 years(TSR down more than 44%). With debt accumulating fast and a downgrade by a credit agency recently. Given the poor acquisitions records and past corporate governance issues. SingPost might be left with its last throw of the dice. This corporate restructuring must be seen as a success. I am taking a situational bet on SingPost. I hope they will be able to get their transformation right. Ultimately, a viable business brings benefits not only to shareholders but also to those hardworking postmen and women which we rely upon for our delivery of those little surprises to our home.
There is no surety how things will pan out on the divestment front, bearing in mind, the business environment could take a turn for the worse. At this juncture, my thesis is pure speculation. This position is not for everyone. Buyer beware. I have to agree with Steven Lim, at the current price(not his price), there is value in the stock, but I wouldn’t go as far as betting the “whole house” on it, literally. God Bless.
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Steven lim already cut loss and half of his 300k is gone
ReplyDeleteHe might have made more by keeping his 3 room hdb flat
ReplyDeleteWarm Regards,
Lone Wolf Investor