Singapore Post - UOB Kay Hian 2022-08-22: 1QFY23 Weak Quarter, Dragged By Domestic Post & Parcel


Singapore Post - 1QFY23 Weak Quarter, Dragged By Domestic Post & Parcel

  • SingPost reported strong 1QFY23 revenue (+34.7% y-o-y) but weak operating profit (-46.7% y-o-y).
    • The Domestic Postal segment underperformed as postal volumes dropped while the International Postal segment saw elevated air freight costs.
    • The Logistics segment saw higher consignment volumes due to the consolidation of Freight Management Holdings (FMH).
    • The Property segment benefitted from the relaxation of social distancing measures.
  • In view of strong headwinds, we downgrade SingPost to HOLD. Target price: S$0.61.

SingPost's 1QFY23 Business Update

  • Weak quarter, dragged by lower volumes. Singapore Post (SingPost, SGX:S08) released its 1QFY23 business update, with higher group revenue (+35% y-o-y, -4% q-o-q) of S$475.2m but soft operating profit (-47% y-o-y, -54% q-o-q) of S$10.6m, forming 26.2% and 9.2% of our full-year forecasts. Revenue was in line with expectations as contributions from the consolidation of Freight Management Holdings (FMH) gave a boost to overall revenue. However, rising operating costs and lower volumes led to a drop in operating profit with operating margins falling to 2.2ppt (-3.9ppt y-o-y, -2.2ppt q-o-q).
  • Lower volumes from industry headwinds. Volumes for the domestic post & parcel (DPP) segment were lower y-o-y as volumes for both e-commerce (-26% y-o-y, +7% q-o-q) and letter & printed papers fell (-2% y-o-y, -2% q-o-q). International post & postal (IPP) volumes also moderated (-33% y-o-y, -4% q-o-q) due to sporadic lockdowns in China, coupled with elevated air conveyance costs. Consignment volumes in Australia were the only positive for 1QFY23 with volumes up (+30% y-o-y, +39% q-o-q) due to the consolidation of FMH.
  • Domestic Post & Parcel (DPP) segment: Challenging outlook… In line with expectations, volumes for SingPost’s traditional letter & mail business continued to decline, given Singapore’s secular trend of going paperless. It was noted that a major e-commerce customer (which we assume is Shopee) has insourced part of its own logistics, sharply decreasing SingPost’s domestic e-commerce volumes for 1QFY23. With the loss of Shopee, along with the short-term normalisation of e-commerce volumes, we expect DPP profitability to take a sharp hit in FY23.
  • Also, the segment is expected to experience margin compression as rising fuel, labour and utility costs eat into profitability. Based on our estimates, 1QFY23 operating loss for DPP is around S$15m.
  • …with potential changes. Management has noted that SingPost is in discussion with government regulators to increase postage rates which may help narrow operating losses. Regarding the possibility of SingPost forfeiting its postal license, in our view, it is unlikely given how SingPost leverages its postal infrastructure network for its e-commerce segment, a segment that SingPost is optimistic on in the long run.
  • Furthermore, in the event of nationalisation/restructuring of SingPost’s postal business, the encumbent would require SingPost to sell its existing postal infrastructure (unlikely as mentioned) or build a new postal infrastructure network which may be too capital intensive.
  • International Post & Postal (IPP) segment: Costs remain elevated but improving. SingPost noted that air conveyance costs remain elevated for most of 1QFY23 but started to decline towards end-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. Also, the majority of these planes are headed towards tourist destinations which may not be SingPost’s target markets.
  • Continued lockdowns in China have depressed outgoing IPP postage volumes with China being SingPost’s largest IPP contributor. Air freight rates should continue to soften gradually as global travel recovers, reaching near pre-pandemic levels in 1HFY24. Based on our estimates, 1QFY23 IPP operating profit is at breakeven level or at a small operating loss.
  • Logistics: Higher volumes Down Under. The segment benefitted from strong growth by CouriersPlease along with additional volume from the consolidation of FMH. A full-year contribution from FMH is expected to boost the segment’s FY23 revenue (+21% y-o-y) and operating profit (+47% y-o-y) significantly.
  • SingPost 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. 1QFY23 operating profit is around S$16m.
  • Property: Occupancy rates remain stable. 1QFY23 occupancy rates at SingPost Centre remained stable as the retail segment maintained its near-full occupancy (99.2%) while the office segment improved slightly to 94.5% from 93.5% in 4QFY22. Management has noted that they are in the process of securing new tenants for their offices. 1QFY23 operating profit is around S$10m, back at pre-pandemic levels.

SingPost - Earnings forecast revision and recommendation

  • We slash our net profit forecasts of SingPost, accounting for lower growth assumptions for the DPP segment, along with lower margin assumptions. We now forecast FY22-24 PATMI at S$36.1m (S$82.5m previously), S$64.8m (S$94.2m previously) and S$92.1m (S$108.5m previously) respectively.
  • Downgrade SingPost to HOLD with a lower P/E-based target price of S$0.61 (previously: S$0.78). We have pegged our P/E multiple to 21.3x, SingPost’s average long-term mean P/E, to SingPost’s average net profit for FY23-25F. This is to account for SingPost’s gradual recovery in earnings. However, based on our SOTP-based valuation, we value SingPost at S$0.79, with the logistics and property segments valued at ~S$1.6b.
  • See
  • Given that SingPost’s market cap is at ~S$1.5b, we think that the postal segment is being undervalued by the market. Any potential reversal in postal earnings could lead to valuation upside.
  • Catalysts: Change in China’s COVID-19 policy, lower-than-expected decline in domestic postal umes.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-22
SGX Stock Analyst Report HOLD DOWNGRADE BUY 0.61 DOWN 0.780