Singapore Post - UOB Kay Hian 2022-06-30: Australia Earmarked As The Next Growth Engine

SINGAPORE POST LIMITED (SGX:S08)

Singapore Post - Australia Earmarked As The Next Growth Engine

SingPost (SGX:S08)’s management provided more updates about the group’s current operations.
- Domestic letter and mail volumes are expected to drop further while e-commerce volumes will suffer a temporary dip as Singapore reopens.
- Air freight costs remain high with more narrow-bodied aircraft transiting at Changi Airport and ongoing China lockdowns dragging postal volumes.
- The logistics segment is set to grow due to the full-year consolidation of Freight Management Holdings (FMH).

Volumes for domestic letter and mail are expected to moderate further with no floor in sight, largely because going paperless is becoming a secular trend. However, management noted that the decline in volumes is not severe enough to result in a redesign of delivery networks and current letterbox allocations.
Coupled with lower volumes, SingPost is facing higher operating costs due to inflation, and these are set to compress margins and drag down profitability. This is in line with our previous expectations.
Moving forward, SingPost has implemented cost-savings initiatives such as new sorting machines and new initiatives to digitise this business.

In line with our expectations, volumes for domestic e-commerce are poised to soften slightly in the near term as Singapore has relaxed most of its COVID-19 restrictions. Discretionary spending on e-commerce may also drop slightly as inflation hits.
Management noted that they are optimistic about the long-term upward trajectory of e-commerce as increasing adoption ramps up, given that online penetration in Singapore is lower compared to other industrialised countries. They re-iterated that growing revenue from domestic e-commerce is expected to mitigate the decline from domestic letter and mail over the medium-long term. Competitors have also not raised prices even as higher costs from inflation impact margins.

Even as Singapore fully reopened its international borders on 26 Apr 22, SingPost is still facing elevated air freight rates, albeit improving slightly since end-Mar 22, according to management. This is largely 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.
Also, ongoing lockdowns in China have depressed outgoing IPP postage volumes with China being SingPost’s largest IPP contributor.
Although we expected some recovery from the 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 (vs our previous expectations of 2HFY23/1HFY24).

In line with our expectations, management has earmarked Australia as SingPost’s next pillar for growth, with its majority stake acquisition of Freight Management Holdings (FMH) set to increase and scale up SingPost’s logistics network in the country.
Also, a full-year contribution from FMH is expected to boost the segment’s revenue and profitability significantly (S$178.7m revenue contribution in 4QFY22).
SingPost also 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.
Based on our estimates, we expect the logistics segment to post robust growths in revenue (+25.3% y-o-y) and operating profit (+47.3% y-o-y) for FY23. This is after impressive growths in FY22 where both revenue (+61.6% y-o-y) and operating profit (+293.5% y-o-y) surged.

Not much was mentioned about the property segment. However, the fact that its retail segment is having full occupancy and its office space is high at 93.5% occupancy as at end-FY22 bodes well for the segment.

We lower our FY22-24 PATMI estimates for SingPost by 5-7%, on current attractive price levels.
See
Share price catalysts:
- Pick-up in air travel.
- Lower-than-expected decline in domestic postal services.
- Earnings-accretive acquisitions.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-30

SGX Stock Analyst Report BUY MAINTAIN BUY 0.87 DOWN 0.900