Singapore Post 1QFY23 Results Preview - UOB Kay Hian 2022-07-22: Headwinds For The Post & Parcel Segment & E-commerce

SINGAPORE POST LIMITED (SGX:S08)

Singapore Post 1QFY23 Results Preview - Headwinds For The Post & Parcel Segment & E-commerce

Singapore Post (SingPost, SGX:S08) has released an operational update for its 1QFY23 (1 Apr 2022 to 30 Jun 2022) and responses to questions from shareholders for its recent AGM. SingPost faces significant headwinds for its domestic post & parcel segment with higher operating costs while international volume gets dragged by elevated air freight rates and the ongoing lockdowns in China.

After the majority stake acquisition of Freight Management Holdings (FMH), Australia remains SingPost’s next strategic growth driver. Maintain BUY call on SingPost with a lower target price.

Facing increasing costs, SingPost’s domestic post & parcel (DPP) segment is expected to experience margin compression as rising fuel, labour and utility costs eat into profitability. In line with expectations, volumes for SingPost’s traditional letter & mail business continue to decline, given Singapore’s secular trend of going paperless.
Moving forward into 2QFY23, Singapore’s authorities is set to distribute a total of about 15m ART kits to all households in Singapore solely via SingPost, giving the DPP segment a well-needed boost to volumes. Cost-saving initiatives such as electric-powered vehicles and new automation/sortation capabilities would also help support margins.
Domestic e-commerce: Unpleasant surprise. A major e-commerce customer has insourced part of its own logistics, which we assume is Shopee, reducing SingPost’s domestic e-commerce volumes for 1QFY23.
Driven by increasing adoption during COVID-19, growing e-commerce volumes have always offset falling letter & mail volumes for the past quarters. However, with the loss of Shopee, along with the short-term normalisation of e-commerce volumes, we expect DPP profitability to take a hit in FY23, dragged down further by rising operating costs.

Even as air traffic into Singapore improves, SingPost noted that air conveyance costs remains elevated for 1QFY23, in line with expectations. We reckon this is due to more narrow-bodied passenger aircrafts, instead of cargo planes, transiting at Changi Airport, resulting in lesser belly hold cargo space that SingPost uses for its IPP postage.
Furthermore, majority of these planes are headed towards tourist destinations which may not be SingPost’s target markets. Also, continued lockdowns in China have depressed outgoing IPP postage volumes with China being SingPost’s largest IPP contributor.
Although we expect some recovery from Singapore’s reopening, we opine it is still early days. Air freight rates should continue to soften gradually as global travel recovers, reaching near pre-pandemic levels sometime in 1HFY24.

Not much was mentioned about the property segment other than being stable. With almost full occupancy at 96.6% and the relaxation of COVID-19 measures in Singapore, the segment is expected to perform well moving forward.
A potential partial divestment of SingPost Centre could also be a strong catalyst.

SingPost mentioned that the logistics segment continued to perform well. With the completion of its majority stake acquisition of Freight Management Holdings (FMH) in 4QFY22, SingPost is set to increase and scale up the group’s logistics network in Australia. A full-year contribution from FMH is expected to boost the segment’s FY23 revenue and profitability significantly.
The group plans to focus its future capex spending on its Australian operations by ramping up consignment volumes and driving synergies in Australia, which would allow it to capitalise on the growing logistics market down under.
Famous Holdings is still expected to benefit from elevated sea freight rates caused by global supply chain disruptions.

We lower our FY22-24 earnings estimates for SingPost, on the back of lower DPP and IPP volumes, along with higher operating costs assumptions. Our core PATMI forecasts for FY22-24 are S$82.5m multiple of 21.2x, similar to its 5-year mean P/E.
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/ 2022-07-22

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