Singapore Post FY22 Results Preview - UOB Kay Hian 2022-04-26: Positive Signs Leading To A Gradual Recovery


Singapore Post FY22 Results Preview - Positive Signs Leading To A Gradual Recovery

  • We expect SingPost (SGX:S08)’s FY22 revenue and PATMI to post strong y-o-y growths, coming off a low base in FY21. The post & parcel segment is expected to recover gradually, driven by e-commerce and the reopening of international borders. The logistics segment continues to benefit from elevated sea freight rates and the property segment from relaxed COVID-19 measures.
  • We opine that SingPost remains attractive at current price levels. Maintain BUY with a higher target price of S$0.86 (previously S$0.78).

Full reopening of Singapore’s international airways.

  • Starting 26 Apr 22, all fully-vaccinated travellers are able to enter Singapore quarantine-free, without the need for a pre-departure COVID-19 test. Under the new Vaccinated Travel Framework (VTF), Singapore’s government has also removed the quota on the number of daily arrivals and the approval process for all travellers. With these measures in place, Singapore’s government targets to restore air travel to 50% of pre-pandemic levels by end-22.
  • Relaxation of domestic social distancing measures. As Singapore transitions to endemic living, the government has further eased its social distancing measures. Starting 26 Apr 22, there will no longer be a cap on group sizes, no safe-distancing is required among individuals, MICE events and sporting events can restart, mask-wearing will be optional outdoors and all employees are allowed to return to the office. Tourist arrivals, footfall in retail malls and physical occupancy of offices are expected to improve as social mobility increases from relaxed social measures.

Improving supply-demand imbalance.

  • Monthly statistics from Changi Airport have shown that the number of commercial aircraft movements has improved since Singapore reopened its international borders, with Feb 22 and Mar 22 figures up ~62% y-o-y respectively. Although this is still at 35-40% of pre-pandemic levels, it is expected to improve to 50% by end-22. With increased cargo capacity and lower mail tonnage, air freight costs are set to drop, reducing volume-related costs for international postal companies such as SingPost.
  • Earnings recovery underway. For FY22, we expect SingPost's revenue and core PATMI to grow by 5.5% y-o-y and 29.8% y-o-y respectively, boosted by strong outperformance from the logistics segment along with a full recovery from the property segment. The post & parcel segment, dragged by elevated air freight rates in FY22, is expected to post a y-o-y decline as volumes and revenue for International Post & Parcel (IPP) drop.

Domestic post & parcel: Earnings expected to rebound.

  • Growth in e-commerce revenue has already offset letter mail decline for the past five quarters, and we expect this trend to continue moving forward. Excluding the rebates from Jobs Support Scheme in 1HFY21, 1HFY22 overall post & parcel operating profit was stable on a y-o-y basis. Since the IPP segment has been operating at a breakeven level since the COVID-19 pandemic started, this implies that growth in domestic e-commerce operating profit is starting to offset the decline in operating profit from domestic letter and mail. We opine that as e-commerce becomes a secular trend, rising profit from the domestic e-commerce is expected to help boost post & parcel overall earnings in FY23 and beyond.
  • IPP: Gradual recovery in sight. Through channel checks, current air conveyance costs for SingPost have come down to 170-175% of pre-COVID-19 levels. This is similar to the global Drewry East West Air Freight Price Index (DAF PI Index) which has started to moderate with the resumption of international air travel in several countries. Additional freight capacity from the new VTF would help soften air conveyance costs further but we reckon it would be a gradual decline over 2-3 quarters instead of a sharp decline. This is due to Changi Airport having to rehire due to reduced manpower and current travel capacity only being at 35-40% of pre-COVID-19 levels.
  • Air freight costs to soften. As air freight costs make up 75-80% of volume-related expenses and 40-50% of total operating costs, SingPost has been operating the IPP segment at a breakeven level. SingPost utilises the bellyhold of planes entering and leaving Singapore for its IPP segment. We reckon that the group would start ramping up its IPP volume once air freight costs reach a commercially optimum level, which might be sometime in 2HFY23. With Changi Airport’s status as a regional air hub, along with lower air freight costs, this would help boost IPP revenue when air travel recovers closer to pre-COVID-19 levels, as about 90% of SingPost’s IPP revenue comes from transshipment revenue.
  • For FY22, we expect post & parcel segmental revenue and operating profit to drop by 11.0% y-o-y and 42.3% y-o-y respectively, dragged by lower IPP revenue and decreasing domestic letter and mail. The larger percentage drop in operating profit is due to both the IPP and domestic letter and mail segments having greater operating margins as compared with domestic e-commerce.

Property segment: Back to pre-COVID-19 levels.

  • Occupancy rates at SingPost Centre remain high with its retail segment having full occupancy and its office space seeing 95.7% occupancy. Management has noted that they are in the process of securing new tenants for their offices but may face some downward pressure on rents as firms start to scale down.
  • For FY22, we expect segmental revenue and operating profit to reach pre-COVID-19 levels, increasing by 2.0% y-o-y and 9.9% y-o-y respectively, backed by higher footfall and tenant sales as social distancing measures ease off.

Logistics segment: Supernormal earnings.

  • In spite of the Omicron outbreak in 3QFY22, consignment volumes grew 7% y-o-y, contributed by new volume from FMH. CouriersPlease performed resiliently in spite of work disturbances with volumes remaining stable y-o-y. Famous Holdings continues to benefit from higher volumes and elevated sea freight rates amid ongoing supply chain disruption but we expect sea freight rates to soften slightly in FY23.
  • We expect FY22 logistical segmental revenue and operating profit to increase by 25.7% y-o-y and 266.5% y-o-y respectively.

Singapore Post - Earnings forecast revision & recommendation

  • Increase FY22-24 earnings forecast for SingPost slightly by 1-3%. This is to account for the earlier reopening of Singapore’s international borders than previously anticipated. Our core PATMI forecasts for FY22-24 are S$78.0m (S$76.4m previously), S$94.8m (S$93.8m previously) and S$116.8m (S$113.7m previously) respectively.
  • Maintain BUY rating on SingPost with a higher SOTP-based target price of S$0.86 (previously S$0.78), as we roll over our multiples to FY23 forecasts. We value:
    1. the mail business at 10.0x FY23F P/E (12x FY22F P/E previously),
    2. logistics business at 7.0x FY23F EV/EBITDA (8.0x FY22F EV/EBITDA previously), both in line with peers’ average, and
    3. 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. Once air freight rates reach an optimal level sometime in 2HFY23, we expect SingPost to ramp up IPP volumes, which will help to boost overall revenue. Therefore, with an expected inflection point approaching and trading at slightly above -1 standard deviation to 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/ 2022-04-26
SGX Stock Analyst Report BUY MAINTAIN BUY 0.86 UP 0.780