Singapore’s Government-Linked Companies need to face up to disruption

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Instead of always relying on possible privileges and support from Temasek Holdings, Government-Linked Companies should face their disruptors head-on.

By Joelyn Chan

Singapore’s Government-Linked Companies (GLCs) seem to be infallible as long as Temasek Holdings Private Limited remains as their major shareholder. Temasek is one of the three key financial institutions linked to the government. It is an investment holding company with a net portfolio value of S$275 billion (US$202 billion). Temasek’s website states that “Temasek’s shareholder is the Singapore Minister for Finance”. It is no wonder that investors highly regard companies with shares held by Temasek.

Back in 2015, there was a GLC restructuring trend. The market welcomed the restructuring as it fueled growth in the slow economy. With GLCs leading the mergers and acquisitions (M&As), there was greater assurance and confidence. Morgan Stanley said that GLCs with a high potential to internationalise and pursue M&A activity included Ascott Residence Trust, ST Engineering, Keppel Corp and Sembcorp Industries while unlisted GLCs included PSA International, Singapore Power, Surbana Corp, Wildlife Reserves Singapore, Singapore Technologies Telemedia, Mediacorp and Pavilion Energy.

The underperformers hide behind Temasek’s strong backing

According to Chris Balding from Peking University, “Only one (Singapore Airlines) or possibly two (DBS bank) of Temasek’s GLCs have established themselves as international brands.” International air transport rating organisation Skytrax, named Singapore Airlines as the world’s second best airline in their latest passenger survey.  On the same note of positivity, DBS maintains its top spot as the largest bank in Singapore and Southeast Asia, with more than 280 branches across 18 markets in Asia.

Source: Temasek Holdings

Not all of Temasek Holdings’ major investments are performing well. For instance, in the telecommunication, media and technology industry, Mediacorp Pte Ltd faces competition from disruptors like Netflix. In the face of intensifying competition and poorer performance, its previous CEO Shaun Seow had left Mediacorp to join Temasek’s Telecom, media and technology investment team.

Temasek acts as a lifebuoy for Singapore Post Limited (SingPost)

Temasek holds 52% of Singapore Telecommunications Limited (Singtel)’s shares, which gives it control over Singtel’s associate company – SingPost. SingPost is Singapore’s postal service provider and designated Public Postal Licensee. Net profit has fallen from a restated amount of S$248.9million (US$183 million) in 2016 to S$33.4 million (US$24.6 million) in 2017. Its market capitalisation value stands at S$2.9 billion (US$2.1 billion), and its average share price continues its downward trend. By market capitalisation, SingPost is currently still good enough to be on the reserve list of Straits Times Index.

Source: SingPost Annual Report

SingPost’s performance during the past few years does not bring it anywhere close to its vision of “being a leader in mail and e-commerce logistics”. Its acquisitions and divestments do help to link up a global transportation network, but its ambition seems too big and too quick for SingPost.

In the financial year ending March 2015, SingPost’s net profit was S$157.6 million (US$115.9 million). Yet, it continued its acquisition spree and acquired TradeGlobal in October 2015 for S$236 million (US$168.6 million). In May 2017, SingPost admitted TradeGlobal’s awful performance and made S$185 million  (US$136 million) impairment. The impairment of 78% of the acquisition sum further supports the findings that reported lacking considerations in the TradeGlobal acquisition. The management has a turnaround plan. But, it may not be effective enough to address the problem, which has been left to worsen for 19 months.

SingPost is paying the price for its bad decision, with borrowings rising and profit falling. One silver lining for SingPost may be the increased investment by Alibaba. E-commerce logistics collaboration helps to boost SingPost’s relevance amidst the changing needs of online retailers. Judging from the major events and corresponding share prices, investors may be losing confidence in SingPost. Being a government-linked company does not provide total immunity against a rock-bottom share price.

Source: SingPost, Yahoo Finance (Singapore Post Limited), Business Times, Straits Times, Dealstreetasia

What would SingPost’s predicament be like, if it was not government-linked?

Lucky for SingPost, it is unlikely that Singtel or Temasek will decide to divest SingPost. The Postal Services Act states that entities need the prior written approval of the Info-communications Development Authority of Singapore before it can own or control 12% or more of the national postal services provider. In other words, buying and selling restrictions lower the possibility of divestment. However, the possibility of divestment is not entirely ruled out, as Temasek has previously sold its stakes in Singapore’s iconic Neptune Orient Lines in 2015. If SingPost’s performance continues to rot, Singtel may decide to cut off this underperforming non-core asset during an economic downturn.

Irrespective of the contemplation in the parent company, SingPost needs more strategic plans to secure its future. It also requires more profits to reverse the damage inflicted by TradeGlobal acquisition. It is insufficient to pin all hopes on greater cash flow from the reduced capital expenditure. Cash flow does not directly equate to profit generation.

In its annual report, it states “In FY2017/18, the Group plans to grow revenue and volumes through new business opportunities, integrating past acquisitions and extracting synergies, as well as leveraging the strategic partnership with Alibaba and its subsidiaries.” These plans sound familiar because SingPost’s FY2015/2016 annual report had similar announcements. It wrote, “As the Group progresses with its transformation initiatives, it will continue developing a global eCommerce logistics ecosystem and extracting synergies from the recent acquisitions.” One would think that integration and synergies plans are analysed comprehensively before the acquisition. Perhaps, the deals were uncertain back then. But, to once again announce plans of extracting synergies show a lack of concrete goals and direction in the management. It needs plans to compete against existing players like DHL and its disruptors like Ninja Van.

Honestly, if GLCs like SingPost or SMRT did not have Temasek Holdings as one of their top shareholders, would they still be in the running?