Singpost (SGX: S08) - A jagged acquisition of Jagged Peak?

On 15 Feb 2019, Singpost announced acquisition of remainder of 21.1% shares in Jagged Peak as the owners have decided to activate their put option. The consideration to be paid for the shares are   US $10.59 million + US $1.75 million (only if a customer debt is recovered).

	Stake	Amount Paid in USD	Book Value	Net Tangible Asset Value	Price paid per % of Jagged Peak in USD
First Acquisition by Singpost (9 October 15)	71.1%	15.8 million	2.9 million (26 June 2015)	-0.7 million (26 June 2015)	0.22 million
Second Acquisition by Singpost (15 Feb 19)	28.9%	10.59+1.75	-0.6 million (31 December 2018)	-3.8 million ( 31 December 2018)	0.3664 to 0.4270 million

              

Key Takeaways

1. Jagged Peak has become a company with negative book value over the time span (Increased liabilities more than Equity)

2. The acquisition of 28.9% of shares in Jagged Peak is more costly than the initial acquisition of 71.1%.

Food for thought

In the Annual Report 2017/2018 it is stated that 'The consideration for the 28.9% under option is dependent on the audited average earnings before interest, tax, depreciation and amortisation (“EBITDA”) of JP for the 3 consecutive financial years ending 31 December 2015 to 31 December 2017. The fair value of the consideration at the acquisition date was estimated at S$13,809,000 based on a multiple of forecasted average EBITDA for the relevant financial years and estimated net debt of S$6,731,000, discounted at 2.9% per annum. The maximum amount that the Group is expected to pay to the key stockholders of Jagged Peak will be S$33,163,000 if the above mentioned criteria are met.'

However in the acquisition the maximum amount to be paid is only USD 12.34 million or SGD 16.74 million (US $1 to SG $1.36 )

While it would be difficult to run the numbers as the exact method of deriving is not told, it can be said that the amount paid is close to half of the maximum. I won't think that the performance is ideal. If it was the put options might not have been exercised as well.

A brief attempt at estimating Singpost (SGX: S08)

Introduction

This post would attempt to briefly value Singpost using the balance sheet and many assumptions.

Singpost is the dominant local mail provider in Singapore with its headquarters situated at Paya Lebar.

In recent years, it has gone on an acquisition spree with as many as 11 companies under its Goodwill.(Goodwill is the excess paid over book value for acquisition of a company)

This has allowed Singpost to expand its logistics and eCommerce business. 

It has also revamped a portion of its headquarters at Paya Lebar into a retail mall.

However, the results of logistics and eCommerce segments seems to be declining in recent years.

Valuing Singpost's discount rate

In determining the discount rate to be used, we would use the rate of return required on equity and debt. As Singpost has perpetual on its balance sheet, we would need to account for those as well.

Tax rate used will be 17% . Assume return of equity to be 15% as a personal target for investing via stock picking.

	Rate of Return	% proportion of Debt + Equity	Total return
Debt	3.5% (Listed Notes)	14.6%	0.424%(0.0042413)
Equity	15%	67.9%	10.185% (0.10185)
Perps	4.25%	17.5%	0.0743%(0.0074375)
Company Discount rate(Sum of 3 above)			11.35% (0.1135)

           

We will be using 11.35% as our discount rate.

Postal Segment

Method of Estimation: Extrapolation of 9 months results and doing a Discounted Cash Flow (DCF) calculation

Bull Case: Assume revenue growth of 3%, Operating margins to be kept steady at 22% as per Q3 results.

Value per share = $0.7673

Normal Case

Assume revenue growth of 0%. Operating margins at 22%

Value per share = $0.5481

Bear case     

Assume revenue growth of -2%. Operating margins at 22%

Value per share = $0.4566

Property

(Lease of Singpost headquarters expires 30 August 2081)

Method of estimation, using discounted cash flow method till 2081 by extrapolating amount of profit at 9mths FY18/19 for full year.

Bull Case: Positive profit growth at 6%

Value per share = $0.3531

Base Case: Positive profit growth at 2%

Value per share = $0.1934

Bear Case: Negative profit growth of 1%

Value per share =$0.1605

Logistics

Method of estimation, using discounted cash flow for bull and base case.

Bull Case. Good turnaround in Q3 continues and profit margins hit 0.7%, 1 % growth

Value per share = $0.001438

Base Case. Assume profit margins of 0.46%(Q3 margins) with 0% growth

Value per share = $0.0009272

Bear Case. Unprofitable business, assume sale at 50% tangible book value(as of 2017 FY)

Value per share = $0.07676

E-Commerce

Segment has been unprofitable  since FY15/16

Method of estimation. Divestment as there is no profits since FY15/16

Bull Case. Divestment at 75% of book value

Value per share = $0.06114

Base Case. Divestment at 75% of tangible book value

Value per share = $0.03464

Bear Case. Unprofitable business, assume sale at 50% tangible book value

Value per share = $0.02310

Overall

Value per Share($)	Bull Case	Base Case	Bear Case
Postal	0.767340369	0.548076822	0.456648576
Property	0.353154134	0.193356617	0.160458906
Logistics	0.001437987	0.000927204	0.076760488
eCommerce	0.061139201	0.034649862	0.023099908
Total	1.183071691	0.777010504	0.716967877
% of scenario occurring	5%	60%	35%
Implied Value Per Share	0.77

Key Concerns

Postal:  Business may not continue indefinitely as the license needs to be renewed periodically.

Property: Estimation of bull case profits increase of 6% could be overly optimistic

Logistics: Business estimation is definitely very difficult as profits for these 9 months of FY 18/19 are very low resulting in margins that are way lower than previous years.

eCommerce: Losses may continue and affect divestment price as these negative profits will reduce equity and in turn reduce assets. This would hurt the divestment value of the segment.

Food for thought

In FY18/19, the company has moved its self storage business (General Storage Company Limited) from Logistics segment to Property Segment. As such it becomes harder to estimate the commercial property rental.

As of Q3 FY18/19, Intangible assets accounted for 13.79% of total assets and 21.5% of net assets. It also amounted to value per share of $0.1677.

Conclusion

I would practice my patience and wait for a purchase price of $0.59 to occur. This would give me a 15% upside to my bear case estimations which is in line with my 15% return on equity set earlier. Any upside that will improve the valuations will have to come from a surge in margins of logistics business or a turnaround in the e-commerce business.

Alternatively, a good exit value of the acquisitions made will improve the net asset value of the company and improve its balance sheet by reducing intangibles.