Singapore Post - DBS Research 2020-02-07: Headwinds Persist

SINGAPORE POST LIMITED (SGX:S08)

Singapore Post - Headwinds Persist

Domestic letter volumes have seen accelerated decline in the last few quarters, while challenges in freight arising from ongoing trade war and potential impact on global supply chains arising from the coronavirus situation are near-term concerns.
Further, Singapore Post (SGX:S08) faces two key headwinds:
1. higher terminal dues adversely affecting international mail volume which has been the key growth driver so far, and
2. higher operating costs in order to improve service quality in Singapore.

It may take Singapore Post 2-3 years to overcome these challenges by investing in technology, in our view. Real growth drivers besides cost-reduction programme over the next 2-3 years are limited for now.

Headline revenues declined 2.0% to S$355.9m on the back of continued decline in domestic letter mail and freight forwarding revenues, as weak performance in these segments continued from the previous quarter. Operating profit declined 24.6% to S$41.3m with all segments except property seeing declines in operating profit, as expenses grew amidst revenue decline. Underlying net profit fell 5.1% to S$31.2m.
Singapore Post has declared a quarterly dividend of 0.5 Scts this quarter, unchanged from last year.

Total revenue declined by 0.8% to S$211.6m. Domestic post and parcel revenues fell as Singapore Post continues to see accelerated decline in business letter volumes and reduction in admail, partially offset by record international mail revenues, while expenses increased due to higher remuneration and postmen headcount amidst other service quality improvement initiatives.
Operating profit declined to S$38.1m (-19.9% y-o-y) on lower operating margins of 18.0% (2Q19: 18.1%), as growth in eCommerce-related packet and parcel volumes was unable to mitigate the impact from declines in domestic letter mail volumes which have higher margins.

Revenue declined to S$132.9m (-1.9% y-o-y) as freight forwarding revenue fell 7.6% y-o-y to S$62.1m. Meanwhile, eCommerce logistics saw revenue growing to S$70.8m (+3.8% y-o-y) as Quantium Solutions continued to see good operational momentum by adding new customers for several quarters now, partially offset by losses in Couriers Please due to Australia bushfires.
Operating losses continued (3QFY20: S$0.7m) due to onboarding costs for SP eCommerce and lower volumes in freight forwarding.

Property segment continues to deliver stable performance, with revenues and profits relatively unchanged y-o-y at S$30.5m and S$13.9m respectively.

According to management, the rate of decline in business letters continued to accelerate in the last three quarters as structural trend of e-substitution continues. We are of the opinion that the next few quarters should continue to see declines in overall domestic post and parcel revenues, which will pressure overall margins.
With new higher terminal having kicked in in January 2020, it also remains uncertain as to how these changes will affect Singapore Post’s inbound and transshipment mail.

While the turnaround at Quantium remains on track as Singapore Post continues to add more customers, we believe the freight forwarding business will continue to drag logistics performance due to impact from global slowdown from ongoing trade war which will continue to affect freight forwarding demand.
Further, it remains uncertain as to how the ongoing coronavirus in China will affect global supply chains, product shipments and international mail volumes for Singapore Post.

We use discounted cash flow valuation (WACC 7%, terminal growth 3%) to derive our Target Price. Note that Singapore Post's FY20F earnings were revised as US businesses were deconsolidated. Downward revision of FY21F earnings was largely due to thinning post and parcel margins.
We maintain our HOLD call as we monitor the impact from higher terminal dues and higher operating costs incurred to improve service quality in Singapore amidst structural decline in business mail. It may take Singapore Post 2-3 years to overcome these challenges by investing in technology, in our view.
In the medium term, management is looking into growth in Southeast Asia, which could come organically and/or inorganically, potentially with bolt-on acquisitions.
See SingPost Share Price; SingPost Target Price; SingPost Analyst Reports; SingPost Dividend History; SingPost Announcements; SingPost Latest News.

Rui Wen LIM DBS Group Research | Sachin MITTAL DBS Research | https://www.dbsvickers.com/ 2020-02-07

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