Analysts are mixed on Singapore Post (SingPost) S08 after the company released its 1QFY2024 ended June 30 business update, in which it reported a 15.0% lower y-o-y overall group revenue of $404.1 million but an 11.8% y-o-y improvement on operating profit at $11.9 million.
UOB Kay Hian Research’s Llelleythan Tan and CGS-CIMB Research’s Ong Khang Chuen have both maintained their “hold” calls on SingPost with reduced target prices of 44 cents and 52 cents, respectively, down from 46 cents and 55 cents previously. Meanwhile, Ada Lim of OCBC Investment Research is keeping “buy” on SingPost with a target price that has inched up from 53 cents to 54 cents.
In his report dated Aug 21, Tan of UOB Kay Hian says that the company’s overall group revenue and operating profits formed 20.0% and 10.4% of his full-year forecasts, respectively, but notes that 1QFY2024 revenue was still largely in line with expectations given that the first quarter of SingPost’s financial year has historically been its seasonally weakest quarter.
He explains that the y-o-y drop in revenue was largely due to a moderation in revenue from Famous Holdings, which contributed some $50 million of the decrease, along with weaker overseas contributions from unfavourable forex impacts.
However, Tan says that 1QFY2024 operating profit still came in below expectations, dragged by the domestic post and parcel (DPP) segment and a stronger Singdollar. On a constant currency basis, he estimates that 1QFY2024 operating profit would have grown by around 40% y-o-y to around $17 million, forming 15% of his full-year estimate — closer and in line with his expectations.
According to SingPost, excluding the DPP segment, most of the group’s businesses were profitable in 1QFY2024. The analyst says that although no segmental numbers were published, the company reported that revenue and volumes for its traditional letter and mail as well as e-commerce businesses continued to decline during the period, with total volumes down 5.3% y-o-y. “Despite additional volumes from new customer acquisitions, higher operating costs continue to plague the segment, with 1QFY2024 registering an operating loss,” says Tan.
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He estimates that the operating loss for the DPP segment for 1QFY2024 stands at around $15 million, and notes that SingPost is still in discussions with government regulators to increase postage rates, which may help narrow its operating losses.
According to Ong of CGS-CIMB, SingPost is awaiting a “stopgap measure” for its DPP segment, which is seeing continued volume weakness across e-commerce and letter mail. Aside from regulatory change, he notes that the company is continuing to work on growing its customer base and wallet share among e-commerce platforms to drive volume recovery and cost-saving initiatives to limit losses.
“We believe its 1QFY2024 results are a clear reflection that given the high operating overheads of the DPP business, stopgap measures such as postage rate increases are needed urgently while discussions with regulators continue on a longer-term solution to tackle the structural challenges of the postal business,” says Ong.
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Given macroeconomic uncertainties and the drag from widening DPP losses creating an uncertain pace of earnings recovery, the CGS-CIMB analyst has lowered his target price to 52 cents, still based on a blended valuation.
Meanwhile, SingPost’s logistics segment has also been held down by falling rates. As sea freight rates returned to pre-pandemic levels, Tan of UOB Kay Hian explains that 1QFY2024 revenue and operating profit declined accordingly. However, SingPost noted that its subsidiary Famous Holdings remained profitable during the quarter with operating margins largely stable, driven by stronger contributions from higher-margin consolidation and logistics solutions services.
Assuming a 7% operating margin, the analyst sees a $50 million loss in quarterly revenue, which would have led to a $3 million to $4 million fall in operating profit to around $3 million for Famous Holdings.
SingPost’s overseas logistics operators have seen some organic growth despite the Australian dollar weakening against the Singdollar by 9% y-o-y. Revenue from its Australian business was flat y-o-y with operating profit growing close to 30%, dragged by industry-wide weakness. On a constant currency basis, 1QFY2024 revenue and operating profit were organically higher, driven by higher customer acquisitions and overall volume growth.
To account for the weaker overseas contributions from the logistics segment due to foreign currency translations, Tan has adjusted his FY2024, FY2025 and FY2026 patmi forecasts lower to $46.5 million, $73.3 million and $94.5 million, respectively.
His decreased target price of 44 cents is pegged to the same price-to-earnings ratio (P/E) of 21.3x. However, based on a sum-of-the-parts (SOTP) valuation, Tan says he values SingPost at 77 cents, with its logistics and property segments worth around $1.8 billion. Assuming a $1 billion valuation for the mailing segment, he would value the company at 67 cents.
“We think that the market is severely undervaluing both the logistics and mailing segments given that SingPost’s current market cap is only around $1.1 billion,” says the UOB Kay Hian analyst.
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Similarly, OCBC’s Lim says that although SingPost’s DPP business is a drag on the broader group, the fundamentals of the rest of its business remain healthy with logistics likely to remain a key driver of growth. The company is also staying optimistic on cross-border e-commerce growth opportunities, she adds.
Lim is awaiting further catalysts including SingPost’s ongoing work with the Infocomm Media Development Authority (IMDA) to ensure the long-term sustainability of its DPP business by balancing its obligations to provide quality postal services with the need to remain “commercially viable”. According to group management, the outcomes of the discussions and a broader strategic review of SingPost’s overall business should be completed within FY2024.
“We await on the sidelines for further clarity on the structural solutions proposed to tackle the structural decline in SingPost’s DPP business and expect SingPost’s share price to remain range-bound in the meantime,” says Lim, who has made “minor adjustments” to OCBC’s forecasts to see her target price increase slightly to 54 cents.
Her potential catalysts for SingPost include accretive acquisitions in the region at reasonable valuation multiples, feasible structural solution to ensure the long-term commercial sustainability of the domestic postal business and the injection of property assets into a REIT. Intensifying competition in logistics and mail, acquisition and integration risks, as well as a slowdown in e-commerce demand could, on the other hand, create risks to Lim’s valuation.
As at 12.47pm, shares in SingPost were trading flat at 51 cents.
