Singapore Post’s (SingPost) proposed acquisition of BEX Group will delay its deleveraging, heightening integration and execution risk during a phase of business transformation, say S&P Global Ratings’ analysts.
The transaction adds incremental ratings pressure on the Singapore-headquartered postal and logistics service provider, says S&P in an unrated report from Nov 3, “given our negative outlook on the 'BBB' long-term issuer credit rating as SingPost navigates a structural decline in the postal services business”.
SingPost announced on Nov 1 the acquisition of BEX Group for a maximum consideration of A$210 million ($185.19 million). The company expects to complete the acquisition by end-November.
At the same time, minority shareholders of SingPost's existing Australian business, Freight Management Holdings (FMH), have exercised their put options to sell their shares to SingPost. Upon completion, SingPost will fully own FMH. The company valued the put option redemption liability at $75 million as at Sept 30.
The BEX Group acquisition is in line with SingPost's goal of becoming a global logistics player. S&P says BEX Group's delivery fleet will complement FMH, which is a fourth-party logistics company.
BEX Group will enhance FMH's in-house logistics capabilities, add the analysts. “If successfully integrated, the acquisition could improve the profitability and operating efficiency of SingPost's logistics business.”
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In addition, earnings accretion from BEX Group will add incremental scale to SingPost's presence in Australia, says S&P.
They expect SingPost's ebitda, including contribution from BEX Group, to come in between $160 million and $210 million in FY2024 and FY2025 ended March.
That said, S&P believes SingPost's market share in Australia's logistics market will remain “modest” even after the acquisition. “This is due to the industry being highly competitive and fragmented.”
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S&P estimates the ratio of debt to ebitda for SingPost will be between 4.0x and 4.7x in FY2024, assuming the acquisition goes through.
This is up from S&P’s previous forecast of 3.0x to 3.5x.
Still, S&P expects SingPost’s leverage to improve over time, with debt-to-ebitda to recover under 3x by FY2026.
‘Weak’ 1HFY2024 earnings
Last week, SingPost posted earnings of $11.5 million for the 1HFY2024 ended Sept 30, compared to the $9.9 million loss in the corresponding period the year before.
S&P says SingPost’s “weak” earnings in 1HFY2024 contributes to its elevated leverage.
The weak figures stem from the normalisation of sea freight rates and foreign currency weakness, particularly the Australian dollar and Chinese renminbi against the Singapore dollar.
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SingPost’s stable operating performance in Australia and higher domestic postage rates from Oct 9 partly offset the weak earnings, says S&P.
“Our negative rating outlook reflects the increasing risk of a downgrade due to persistent weakness in SingPost's post and parcel business, and its shifting portfolio mix. The company expects to complete its strategic review within the current financial year, by March 2024.”
As at 9.55am, shares in Singapore Post S08 are trading flat at 48.5 cents.
