The rate hikes secured by SingPost for its loss-making domestic mail business can help investors shift their focus to its growing logistics businesses instead, according to CGS-CIMB analyst Ong Khang Chuen in his Sept 18 report.
On Sept 19, SingPost announced that the government had given it the go-ahead to increase the domestic mail rate by 64.5% from 31 cents to 51 cents.
SingPost shares on Sept 19 gained by as much as 2.5 cents, or just over 5%, to 51 cents before easing slightly. The higher rate, to take effect from Oct 9, comes amid a 40% drop in domestic mail volume between SingPost’s FY2019 ended March 2019 and FY2023.
The approval for the hike was also given amid an ongoing wider strategic review led by CEO Vincent Phang.
Besides the rate hike, Ong sees a few other positive catalysts prompting him to upgrade his call on SingPost from “hold” to “add”, along with a higher target price of 60 cents from 52 cents.
First, SingPost had increased its stake in its Australia subsidiary Freight Management Holdings (FMH) from 51% to 88% starting March, which will help lift earnings.
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Between FY2019 and FY2023, FMH recorded revenue grew at a CAGR of 27% and ebit of 40% while generating an ROE of 20% in the most recent FY2023, notes Ong, who estimates that FMH is valued at between $750 million and $1.1 billion, using the current year FY2024 EV/Ebitda multiple of between 8 and 12 times.
In addition, further earnings recovery for FY2024 will be “anchored” by SingPost’s international business which is enjoying tailwinds from China’s reopening, says Ong.
He notes that over the past year, SingPost has been expanding its cross-border offerings by introducing new cost-effective, high-quality commercial solutions to complement its international postal network.
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This move, promising shorter delivery times, is aimed at the cross-border e-commerce platform market. “We believe this will aid customer acquisitions and allow SingPost to manage its margins for this business better,” says Ong.
Meanwhile, Ong sees a couple of other catalysts. First and foremost, Ong believes that SingPost Centre, which includes mall and office space and is tacked with a fair value of $850 million, is a “prime target” for monetisation.
SingPost Centre, located right next to the Paya Lebar MRT interchange station, has a gross floor area of 269,000 sq ft, a net lettable area of 178,000 sq ft and an occupancy rate of 98.2% as of March versus 95.8% as of March 2022.
According to Ong, SingPost has several options when it comes to the potential monetisation of the asset. For one, it can potentially consolidate its mail sorting now done at SingPost Centre together with its parcel sorting operation at Tampines, freeing up more net leasable area.
Bigger plans might be afoot. On Aug 6, 2021, SingPost incorporated Paya Lebar Central Partnership, a company limited by guarantee, together with two other entities, Paya Lebar Square and Australia-based developer Lendlease, which owns Paya Lebar Quarters.
The three neighbours incorporated the company under the Urban Redevelopment Authority’s business improvement district (BID) programme, which aims to rejuvenate the Paya Lebar Central Precinct Area, which includes a now empty plot of land flanked by Sims Avenue, Eunos Road 5 and Paya Lebar Link.
Another possible way to deliver better value, according to Ong, is for SingPost to bring in strategic shareholders for its Australia-based businesses or to launch an IPO.
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Following the spate of acquisitions and growth over the years, SingPost’s Australia-based businesses contributed around 44% of the revenue for FY2023, versus just 12% back in FY2019. The growth has been largely driven by FMH, a so-called fourth-party logistics player.
Ong notes that FMH’s peers in Australia trade at an average of 6.6x FY2024 EV/Ebitda, similar to SingPost’s 6.5x EV/Ebitda but lower than global peers which are trading at 10x EV/Ebitda on average.
“Given that SingPost’s Australian operations are showing a much faster growth profile than SingPost overall, and runs on an asset-light model, we believe it deserves to be trading at a higher valuation versus SingPost overall,” says Ong.
“Hence, we think that a strategic stake sale is likely the preferred outcome for SingPost’s Australian operations to raise funds for future growth, on top of the ability to tap on debt financing,” he adds.
SingPost could also divest other non-core, non-performing businesses to free up capital, says Ong. These assets were typically minority stakes in other small logistics companies and were bought under the previous management teams.
One such possible sale of its stake in Malaysia listed GDEX, which has a market capitalisation of around RM930 million ($270.5 million), valuing SingPost’s 12.27% stake at $33 million.
Ong notes that other similar stakes include Dash Logistics in Vietnam, Efficient E-Solutions in Malaysia and Morning Express & Logistics in Hong Kong. SingPost’s stake in these three entities ranges between 20.81% and 33%.
