Singapore Post - UOB Kay Hian 2020-08-13: Facing Challenging Cost Pressures

SINGAPORE POST LIMITED (SGX:S08)

Singapore Post - Facing Challenging Cost Pressures

SingPost’s operating profit for 1QFY21 was down 49% y-o-y, below expectations. While e-commerce delivery volumes increased impressively in international postal, cost pressure from supply chain disruptions, such as increased conveyance costs, was a dampener and is likely to weigh on the group until international flight restrictions are eased to a larger extent.
Maintain HOLD with a lower target price of S$0.76. Entry price: S$0.66.

SingPost (SGX:S08) provided 1QFY21 business updates with operating profit coming at S$22m, down 49% y-o-y. This accounts for 19% of our full-year estimates, below our expectations. Full financials were not disclosed as the group has transitioned into half yearly reporting.

SingPost’s revenue rose 12% y-o-y from growth in cross-border e-commerce delivery volumes. International post and parcel revenue increased 30% y-o-y, while the logistics segment’s revenue increased 17% y-o-y. However, letter volume mail continued its structural decline with business mailing being reduced as a result of the Circuit Breaker measures.
According to the group, letter and printed papers amounted to 100m items in 1QFY21, a drop of 33% y-o-y.

SingPost’s expense grew 22% y-o-y to S$341m in 1QFY21. This is a result of supply chain disruptions, which was partially mitigated by the Jobs Support Scheme. Supply chain issues mainly comprised massive disruption to international air freight out of Changi Airport, resulting in delays and increased conveyance costs. There were also higher terminal dues for international postal items which have increased since Jan 20. The group also experienced higher costs as a result of health and safety arrangements for COVID-19, such as temporary housing for Malaysian workers in Singapore.
Overall, postal operating margins dipped to a low of 6.5% (-3.1ppt q-o-q, -13.6ppt y-o-y)

SingPost retail mall saw a decline in footfall since Mar 20 due to the Circuit Breaker measures, with rental relief support being provided. The financial assistance, which was partially reflected in 1QFY21 and will continue into 2QFY21, resulted in a 16% y-o-y drop in property income. Committed occupancy remained steady.

While e-commerce volumes have seen a commendable increase, supply chain disruptions, especially with international flights have increased the cost base for SingPost to a larger extent. The group noted that the disruption has also temporarily diverted volumes of some key customers away from Singapore.
Until air travel restrictions are lifted, we think its postal segment will continue to experience cost and margin pressures.

Trim SingPost's earnings by 6% for FY21; FY22-23 earnings are unchanged. We factor in higher international postal revenue on the back of strength in e-commerce deliveries, assuming a 20% y-o-y growth. However, we build in thinner margins for the postal segment due to cost pressures.
Maintain HOLD with a lower SOTP-based target price of S$0.76.
We value:
- SingPost's mail business at 10x FY21F PE;
- logistics business at 8.0x FY21F EV/EBITDA, both in line with peers’ average; and
- property at cap rate of 5%.
Entry price is S$0.66.
See SingPost Share Price; SingPost Target Price; SingPost Analyst Reports; SingPost Dividend History; SingPost Announcements; SingPost Latest News.
SingPost currently trades at -0.5SD to its long-term mean PE.
SingPost's share price catalysts:
- Lower-than-expected decline in domestic postal.
- M&As.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-08-13

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.76 DOWN 0.800