Singapore Post - UOB Kay Hian 2022-03-02: 3QFY22 Robust Quarter, Spearheaded By E-Commerce


Singapore Post - 3QFY22 Robust Quarter, Spearheaded By E-Commerce

  • SingPost reported strong operating profit of S$38m, in line with our expectations and driven by e-commerce. Domestic e-commerce volumes surged due to growing mass adoption. Australian operations remained steady despite Omicron outbreaks. We become more optimistic about international post as elevated air freight rates start to soften.
  • Upgrade SingPost to BUY with a higher target price of S$0.78.

SingPost's 3QFY22 Business Update

  • Strong quarter, aided by year-end seasonality. Singapore Post (SingPost, SGX:S08) released its 3QFY22 business update with group revenue (+24% y-o-y) and operating profit (+46% y-o-y) surging in line with expectations, forming 79.8% and 80.0% of our FY22 full-year forecasts respectively. The outperformance was largely contributed by Famous Holdings, e-commerce growth and the consolidation of Freight Management Holdings (FMH) in 3QFY22. Also, 3Q is historically SingPost’s seasonally strongest quarter.
  • Cost efficiency helped boost profitability. Despite the absence of S$6.1m in government relief from Singapore’s Job Support Scheme, operating profit grew 46% y-o-y as elevated sea freight rates, better cost efficiency and lower tenant rental rebates helped expand overall margins. International Post and Parcel (IPP) profit also grew despite lower revenue.
  • Health balance sheet. SingPost remains in a healthy net cash position at S$111m as of 3QFY22 (S$179m at 4QFY21). The drop in net cash is largely due to the FMH acquisition.
  • Domestic Post: Next growth driver. Domestic e-commerce volumes rose (+50% y-o-y, +23% q-o-q) in 3QFY22 due to the peak shopping season and increasing adoption in e-commerce. Domestic letters and printed papers continued their y-o-y decline (-9% y-o-y) but increased 8% q-o-q due to the seasonal peak. Growth in e-commerce revenue has already offset letter mail decline and is expected to be SingPost’s main revenue driver moving forward.
  • IPP: Costs remain elevated but improving. Although Singapore has been steadfast in reopening its international borders, the IPP segment continues to be impacted by limited freight capacity. However, management has noted that air freight rates have improved gradually since the reopening but are still at elevated levels when compared to pre-COVID-19 levels. We estimate that air conveyance costs are down from 197% of pre-COVID-19 levels to 160-170% of pre-COVID-19 levels. Historically, these costs make up 75-80% of volume-related expenses and 40-50% of total operating costs. While the group has reduced IPP volume flows to manage costs, we reckon that the full opening of Singapore’s borders would help soften air freight rates closer to pre-COVID-19 levels by 1HFY23.
  • Logistics: Higher volumes down under. In spite of Omicron outbreaks in 3QFY22, consignment volumes grew 7% y-o-y, largely contributed by new volume from FMH. CouriersPlease, the last mile delivery business in Australia, performed resiliently in spite of work disturbances with volumes remaining stable y-o-y. Famous Holdings continued to benefit from higher volumes and sea freight rates amidst ongoing supply chain disruptions.
  • Property: Occupancy rates remain stable. 3QFY22 occupancy rates at SingPost Centre remained stable as the retail segment maintained its full occupancy while the office segment softened slightly to 95.7% from 97.6% in 2QFY22. Management has noted that they are in the process of securing new tenants for their offices. Occupancy rates for the Others segment remain high at 98.4%.

Singapore Post - Earnings forecast revision & recommendation

  • No changes to our estimates. Upgrade SingPost to BUY with a higher SOTP-based target price of S$0.78 (previously: S$0.75). We value:
    • the mail business at 12x FY22F P/E (10x FY22F P/E previously),
    • logistics business at 8.0x FY22F EV/EBITDA, both in line with peers’ average, and
    • property at a cap rate of 5%.
  • We reckon that SingPost is on the verge of a strong recovery, driven by the growth in e-commerce. E-commerce in both domestic and overseas markets has outperformed and is expected to continue for 4QFY22 and beyond.
  • Also, with the return of international flights into Singapore, air freight rates are expected to moderate as flight capacity increases. Once air freight rates reach an optimal level sometime in 1HFY23, we expect SingPost to ramp up IPP volumes, helping boost overall revenue. Therefore, with an expected inflection point approaching and trading at slightly above -1 standard deviation of its five-year mean P/E, we opine that SingPost has significant potential upside at current attractive price levels.
  • See
  • Catalysts:
    • Pick-up in air travel volume.
    • Lower-than-expected decline in domestic postal.
    • M&As.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-02
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