KUALA LUMPUR, Aug 6 — Singapore Post continues to make acquisitions, as it diversifies from its stagnating traditional postal business into one with five pillars: mail, digital services, logistics, e-commerce, and retail financial services.

When we interviewed CEO Dr Wolfgang Baier in May last year, he said the company had to boost productivity by 50 per cent, in view of the company’s expectation of a 30 per cent decline in demand for traditional postal services per household by 2018, even as 30 per cent more households are established in Singapore.

This put pressure on Dr Baier and the team he brought with him from McKinsey to transform the business.

He said he was looking for financially healthy companies with a good strategic fit with SingPost, run by people who shared their values.

Companies which needed to be turned around and nursed back to health would not be considered.

The most recent acquisitions involve relatively small amounts – millions of dollars, as part of a S$100 million (RM256 million) expansion over three years, announced in 2013.

But the question investors would still want answered is whether SingPost is overpaying.

Investor Central. We keep your investments honest.

During July, SingPost announced proposals to acquire F.S. Mackenzie Limited in the United Kingdom and The Store House Limited in Hong Kong.

F.S. Mackenzie has been set up as a conditional sale and purchase agreement for GBP7 million (S$14.8 million) for complete ownership.

Singapore Post entered this negotiation with Alfred Steinen through its subsidiary, Famous Holdings Pte Ltd, another of Dr Baier’s acquisitions.

If the deal goes through, this will be Singapore Post’s first foothold in the western European market.

In the announcement, it said it would buy 83,524 issued and paid-up ordinary shares comprising the company’s entire paid-up capital.

The GBP7 million (S$14.8 million) price tag consists of an initial consideration of GBP4.1 million (S$8.7 million) to be paid on completion of this transaction; an escrowed sum of up to GBP0.8 million (S$1.7 million) subject to indemnity and set-off provisions; and a potential earn-out of up to a maximum of GBP2.1 million (S$4.4 million) subject to adjustments to net profit after tax in accordance to the earn-out consideration, which is to be paid three years after completion of this transaction.

Singapore Post says it is funding this acquisition with internal resources.

Net asset value of F.S. Mackenzie is GBP2.5 million (S$5.4 million) based on its latest unaudited financials for the fiscal ending December 31, 2013.

F.S. Mackenzie will become a subsidiary by October, three months after the date of the agreement.

1. Why pay three times NAV for F.S. Mackenzie?

F.S. Mackenzie has a NAV of GBP2.5 million (S$5.4 million) based on its unaudited financials for FY13.

But Singapore Post is paying up to GBP7 million (S$14.8 million), three times as much.

And this leads to the question:

2. What is the potential of the western European market?

Management reply: Our valuation is arrived at by comparing various market price multiples of comparable companies as well as using a discounted cash flow model. We are confident that our valuation is well within the norms that the market is currently paying for asset light freight forwarders such as FS Mackenzie.

3. What are SingPost’s plans for the business?

Management reply: We plan to merge this with the existing Famous group of freight forwarding companies and to extract synergies across the network.

The Store House

The acquisition of The Store House is expected to capture self-storage business in Hong Kong and in the region.

From its Q4 financials, Singapore Post generated S$85.1 million cash from operations and has S$404.4 million in reserves.

The proposed acquisition of The Store House Limited is also set up as a conditional sales and purchase agreement where Singapore Post through subsidiary General Storage Company Pte Ltd made the announcement of this intent with individuals Gary Philip Beadell, Emely Sumajit Beadell and Rupert Charles Skrine to purchase the entire capital comprising the company.

The price tag of HK$75 million (S$12.1 million) comprises an initial HK$60.9 million (S$9.8 million) paid on completion of the transaction, and a potential earn-out consideration of up to HK$14.2 million (S$2.3 million) paid after one year of the completion of this sale.

Just like the proposed F.S. Mackenzie acquisition, internal funds will be used to pay for it.

Net asset value of The Store House is HK$11.00 million (S$1.8 million) as of 28 February 2014.

The acquisition of The Store House is expected to take place on September 30, 2014, when it will become a subsidiary of Singapore Post.

4. Why is it paying three times the Net Asset Value for The Store House?

The announcement states that the Net Asset Value of The Store House is HK$11 million (S$1.8 million) as of February 28, 2014.

And there is the earn-out consideration of up to HK$14.2 million (S$2.3 million) to add to that.

Management reply: The consideration for the Acquisition was arrived at on a “willing buyer-willing seller” basis, taking into account, amongst others, the future performance of TSH and its existing assets and operations. Our experience shows that the acquisition price is in line with market value for such business.

5. How was the earn-out consideration calculated?

Management reply: The earn-out consideration is subject to the achievement of earnings targets.

6. Why the convoluted ownership structure of The Store House?

The precedent conditions in the sales and purchase agreement mentions both The Store House Capital Partners and The Store House Operating Company Limited.

The Store House Capital Partners is a British Virgin Islands (BVI) incorporated company.

Management reply: We are acquiring 100 per cent of The Store House from the Vendor.

Other acquisitions

Still earlier this year, Singapore Post bought TRAS-Inter in Japan and Axis Plaza in Malaysia.

Axis Plaza, part of the property portfolio of the Axis-REIT, was valued by KGV International Property Consultants (M) Sdn Bhd at RM37 million (S$14.3 million) and purchased at RM34 million (S$13.1 million).

7. What will be done now that Axis Plaza has been successfully acquired?

How long before can we start to quantify the profitability of this leg of operations for the group?

What are the targets set for this unit?

TRAS-Inter, a Japanese customs broker and freight forwarder, had Net Asset Value of JPY11.9 million (S$148,000) based on its unaudited financials for the fiscal ended April 30, 2014.

It was purchased for JPY240 million (S$3 million) – twenty times as much.

Management reply: The property is acquired to support the expansion of the Company’s regional operations. The Malaysia operations of Quantium Solutions is located at this facility. We will also be launching the self-storage operations at this location in October.

8. Why did TRAS-Inter command a twenty-fold sale price above NAV?

If TRAS-Inter’s NAV was S$148,000 based on its most recent financials, what gives it the bargaining power to ask for S$3 million?

Management reply: Our valuation is arrived at by comparing various market price multiples of comparable companies as well as using a discounted cash flow model, not just Price to Book multiples. We are confident that our valuation is well within the norms that the market is currently paying for asset light freight forwarders such as TRAS-INTER.

9. What does the market for Japan and the region look like?

Management reply: The global freight forwarding market is and will still be dominated by Asian countries with Japan being the second largest Asian market for both export and import freight. We do not see this picture changing significantly.

Alibaba stake approved

10. What is the latest on Alibaba’s purchase of a stake in SingPost?

The Monetary Authority of Singapore (MAS) has given its approval for Singapore Post to place 6,074,000 new ordinary shares to the Alibaba Group at S$1.42/share.

This marks the formal blessing from the central bank for Alibaba’s acquisition of a 10.32 per cent stake, first announced May 28.

This comes after approvals for appointing an investor-nominated director to the 10-member board of SingPost Group on July 17, and the in-principle approval for substantial shareholding on July 18.

Under a Memorandum of Understanding, Alibaba and SingPost will start a joint venture in international e-commerce logistics.

Management reply: On 15 July 2014, the Monetary Authority of Singapore (MAS) gave its approval for Alibaba Group to become a substantial Shareholder (ie more than 5 per cent) of SingPost. This approval is required as SingPost holds a remittance licence and money changing licence.

On 18 July 2014, IDA gave its approval for Mr Chen Jun, Vice President in Alibaba Group, to be on SingPost’s Board. IDA approval is a requirement under the Postal Services Act.

On 23 July 2014, MAS gave its approval for Mr Chen Jun, Vice President in Alibaba Group, to be on SingPost’s Board. This is a requirement because SingPost holds a remittance licence and money changing licence.

On 31 July 2014, Alibaba Group became a shareholder of SingPost with the transfer and issue of a total of 220.096 million shares to Alibaba Investment Limited in accordance with the terms of the Investment Agreement. With this, Alibaba Group now holds 10.32 per cent stake in SingPost. On the same day too, SingPost announced the appointment of Mr Chen Jun, Vice President in Alibaba Group, to the SingPost Board.

Meantime, Singapore Post Limited is continuing to expand its business.

Since this announcement, share price spiked on euphoria from S$1.505 on May 26 to S$1.68 on May 29.

And the stock price has been climbing since May 14 where it was at S$1.435.

The SGX queried unusual trading levels on June 18, but Singapore Post replied it could not explain why.

We did not find announcements on or before June 18 which could tell why either.

Had it anything to do with the incorporation of Quantium Solution Holdings Pte Ltd in Singapore, a development in June and nearest the trading spike?

In February, Quantium Mail Logistics Solutions (India) Private Limited increased its capital base from INR5 million (S$101,900) to INR162.676 million (S$3.32 million) by allotting 15,767,600 new shares at INR19.20 each to its parent company, Quantium Solutions International Pte Ltd.

Quantium Solutions International is a wholly-owned subsidiary of Singapore Post.

The February 20 announcement states this allotment was funded through internal sources.

On June 2, Quantium Solutions Holdings Pte Ltd was incorporated in Singapore as a wholly-owned subsidiary of Singapore Post.

We thank the company for its replies. — Investor Central

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