CGS-CIMB Research analyst Ong Khang Chuen has maintained his “hold” recommendation for Singapore Post S08 (SingPost) despite the company’s newly announced strategic review of its postal services. He has kept his target price unchanged at 55 cents.
In his report dated July 6, Ong says that he sees SingPost’s review of the commercial sustainability of its postal business together with the Infocomm Media Development Authority (IMDA) as a “step in the right direction”, and believes this will help its near-term share price sentiment given that the company’s post and parcel segment is loss-making.
According to SingPost, the review will aim to strike a balance between the long-term commercial sustainability of the company and providing essential postal services for Singapore.
Ong notes that Senior Minister of State for Communications and Information Tan Kiat How announced in parliament that the government will consider allowing SingPost to introduce more frequent postage rate adjustments to better reflect costs of the letter mail business in the future.
Key discussion points to be addressed in SingPost and IMDA's review include postage rate adjustments as well as a cost and operating model review, which will include the optimisation of SingPost’s post office network, adds the analyst.
He believes that the intention to allow SingPost to remain commercially viable without requiring direct government funding is the correct move, but notes that a “holistic approach” will also be required to tackle the structural issues of postal decline. “Rate adjustments are only a partial solution and could backfire in potentially accelerating volume declines,” explains Ong.
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The analyst points out that SingPost’s post and parcel segment recorded a full-year operating loss of $15.9 million in FY2023-ended March due to weaker delivery volumes and inflationary cost pressures, and adds that the company expects the segment to remain loss-making in FY2024.
Ong sees potential for a rationalisation of the post office network and sorting centres in Singapore to lower fixed overhead costs, which could also open up opportunities for SingPost to monetise its investment properties worth $965 million.
Given the improbability of direct government funding, the analyst says he would only turn more positive on SingPost in the event of greater clarity on its plans to merge existing sorting centres, which could lead to the potential monetisation of SingPost Centre.
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He has kept his target price of 55 cents unchanged — based on a blended price-to-earnings (P/E) and sum-of-the-parts (SOTP) valuation — as he believes SingPost’s strategic review raises the potential for asset monetisation. Ong is maintaining “hold” considering the pace of SingPost’s earnings recovery remains uncertain given the various macro headwinds
The analyst’s upside risks include a faster-than-expected recovery of the international post and parcel (IPP) business and earnings-accretive mergers and acquisitions (M&As). His downside risks remain centred around prolonged volume weakness for domestic post and a further spike in operating costs from inflation, which would hurt SingPost margins.
As at 2.28pm, shares in SingPost were trading 1 cent or 2.08% down.
