<h4>Transport/Storage/Communications</h4>

<h3>The Edge Billion Dollar Club 2017</h3>

(Oct 23): Singapore’s biggest companies in the transport, storage and communications category have one thing in common: They have spent the last few years coping with intense competition and disruption in their respective industries.

In the telecommunications space, for instance, the incumbents, Singapore Telecommunications, StarHub and M1, are bracing themselves for the entry of a fourth player. At the same time, their mobile phone subscribers are increasingly turning to platforms such as WhatsApp to make phone calls and send text messages. Subscribers to the pay-TV services of Singtel and StarHub are also being drawn away by streaming services such as Netflix.

In the transport sector, shares in ComfortDelGro Corp have been under pressure as its taxi business loses market share to ride-hailing companies Grab and Uber, while Singapore Airlines has been fighting a long-standing battle against low-cost airlines and the Middle Eastern carriers. Then, there is Singapore Post, which ventured into e-commerce and logistics in search of new growth opportunities but has since stumbled on execution missteps.

Despite the challenges, these companies managed to achieve an average net profit growth of 6.2% over the last three years. They also had a high weighted return on equity of 44.8% over the same period, though this was mostly because of StarHub, which had a high weighted ROE of 212.7%. StarHub wrote off the goodwill associated with its acquisition of Singapore Cable Vision in 2002, which depressed its shareholders’ equity and inflated its gearing. Even without StarHub, however, the average weighted ROE for this category would still have been 16.8%, which is higher than all the other categories.

In terms of stock returns, however, these companies’ performance was more pedestrian, averaging 3.3% over the last three years. That could change if some of the new initiatives they are pursuing pay off. For instance, the telcos are ramping up their enterprise services, which are focused on themes such as cybersecurity and the Internet of Things.

Over at SingPost, the company’s e-commerce logistics investments may yet offer the 198-year-old postal company a new avenue of growth. And, ComfortDelGro is now in talks with arch-rival Uber, which could result in an interesting partnership.

SingPost tops the list It may surprise some market watchers that Sing- Post ended up the top scorer in this sector, given that the company has been the subject of some very negative news over the last couple of years. In particular, the company said in May that it would take a massive write-down on a US-based e-commerce business called Trade- Global that it bought in 2015 for US$168.6 million. TradeGlobal, the largest of a series of investments SingPost made in recent years, lost two customers who accounted for 30% to 40% of its revenue, in the face of disruption in the US fashion retail sector.

To make matters worse, a review by Wong Partnership revealed that there had been lapses surrounding SingPost’s acquisition of TradeGlobal, including a failure to document due diligence and a lack of clear leadership in undertaking the project. By then, SingPost was already reeling from a series of departures of top executives and accusations of faulty corporate governance.

In the three months to June, SingPost reported a 13.6% y-o-y decline in earnings to $31 million despite a 6.2% rise in revenue y-o-y to $354.1 million. Postal operating profit fell 13.7% to $36.3 million, owing to a decline in domestic mail volume. Logistics operating profit plunged 39.3% to $4.4 million amid competitive pressure. Its e-commerce unit was hit by losses related to TradeGlobal and suffered a widening of operating losses to $4.2 million from $3.5 million during the same quarter the previous year.

Over the last three years, however, SingPost managed to deliver net profit growth of 22.2% a year, the second-highest rate of growth in its category and a key reason it achieved the top overall score. The big question is how quickly SingPost will be able to get its earnings growth back on track.

On a positive note, SingPost has recently appointed a new CEO, Paul Coutts, who is helming a group-wide strategic review. Among the new initiatives the company is pursuing is Sing- Post Centre, a retail mall that will be opening up in phases from this month. SingPost is hoping to entice consumers with a new kind of omnichannel retail experience in which shoppers can collect items purchased online at the mall, or shop there and have SingPost deliver their purchases to their doors. According to OCBC Investment Research, the mall could contribute $17 million a year to SingPost’s rental and property-related income when fully opened.

SingPost has a partnership with Lazada Group, which is now a subsidiary of Alibaba Group Holding. Lazada has moved its warehouse operations to the SingPost Regional eCommerce Logistics Hub to boost efficiency and turnaround time. SingPost’s e-commerce logistics business could also benefit as Lazada ramps up its offerings in Southeast Asia. On Sept 25, Lazada announced that it was expanding its Taobao Collection to Thailand, the Philippines and Indonesia.

Battle of the telcos Singtel was the third-best overall performer in the category and the best performer among the telcos. It scored better than M1 and StarHub on net profit growth and stock return over the last three years. But it had a lower weighted ROE than the other two telcos.

In 2Q2017, all three of the telcos reported weaker earnings as their mobile phone operations faltered under intense competition. In 1HFY2017 ended June, StarHub’s earnings before interest, taxes, depreciation and amortisation (Ebitda) fell 9.2% to $341 million as revenue from its mobile, pay-TV and broadband segments fell. For the six months to June, M1’s Ebitda declined 7.8% to $152.4 million from weaker mobile revenue. Singtel faced steeper competition in Singapore and India, but its Australian contributions offset this. Singtel’s Ebitda in 1QFY2018 ended June improved 2.7% to $1.3 billion.

With the fourth telco TPG Telecom entering the Singapore market soon and competition from mobile virtual network operator Circles. Life, OCBC expects all three of the telcos to suffer weaker average revenue per user over the next five years. Singtel would be the least affected as its local mobile phone business made up only 4% of its revenue in 1QFY2018. By contrast, StarHub and M1’s local mobile phone businesses accounted for 55% and 88% of their respective operating revenues in 1HFY2017.

However, the smaller telcos are working hard to offset the weaknesses in their mobile phone businesses. M1, which has been the most affected, launched a nationwide Narrowband IoT network earlier this year, which allows the company to tap the growing Smart Nation trend. M1 already has customers involved in smart energy management for buildings, environmental monitoring and fleet management. In recent years, M1’s fixed services revenue has been growing steadily too. In 1HFY2017, fixed services revenue increased 22.3% y-o-y to $61 million. In FY2016, revenue from this business was up 21.4% to $104.2 million. This revenue includes contributions from its cybersecurity services and data centre solutions.

Troubles in transport ComfortDelGro was the second-best overall performer in the category and the best-performing transport company.

Interestingly, it also chalked up the second-best stock return over the last three years, despite the beating its shares suffered this past year. The selloff was sparked by news that more of its taxis were being left idle as its cabbies are enticed to drive for Grab. Some 3,000 cabbies are said to have deserted the company, resulting in its taxi fleet hitting a seven-month low in July. Also, ComfortDelGro lost out to SMRT Trains in a bid to operate and maintain the Thomson-East Coast Line.

In the three months ended June, Comfort- DelGro’s revenue slipped 3% y-o-y to $1 billion and its earnings fell 7% y-o-y to $79.4 million. Revenue from the taxi business, which includes ComfortDelGro’s overseas taxi operations, fell 10.7% y-o-y to $303.9 million.

While ComfortDelGro’s local taxi business may be deteriorating, it is still cash rich. That has some analysts expecting the company to pay out higher dividends despite sluggish earnings. “Our stress test shows that even at a 90% payout ratio, ComfortDelGro will be in a net-cash position of $287 million to $584 million in FY2017 to FY2019,” says CIMB Research in a report. It is now forecasting a dividend payout ratio of 75% instead of 70% for FY2017 to FY2019. At ComfortDelGro’s current stock price, that translates into a yield of more than 5%.

Maybank Kim Eng Research also reckons that the rail segment will make a turnaround from a loss of $25 million in FY2017 to a profit of $5 million in FY2018 and $27 million in FY2019. This comes on the back of the opening of Downtown Line 3 this month.

SIA, the only other transport company in the category, chalked up the best net-profit growth over the last three years. It was only in fourth position overall, as a result of scoring poorly on stock return and profitability. One concern that analysts have is that SIA could face tougher competition as Qantas Airways reroutes its Sydney-London flights through Singapore instead of Dubai.

Finally, while CWT had the lowest overall score in the sector, it had the highest stock return over the last three years. This is likely because the logistics and warehousing firm has received a formal offer from HNA Group to buy all its shares in a deal that values CWT at US$1 billion ($1.36 billion). CWT will be delisted after being acquired.

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Competition, disruption weigh on stock returns, but category delivers best ROE

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