Investors have responded positively to Singapore Post S08 ’s (SingPost) strategic review, which outlined a clear objective of becoming a tech-driven, pure-play logistics enterprise with a significant presence in Australia within three years.
As SingPost grappled with the structural decline of its former core business of delivering domestic mail, its share price has dropped by more than half in the last five years. When the strategic review was announced on March 19, SingPost’s share price surged 7.9% to close at 41 cents on March 20.
Referring to its “significant and profitable” business in Australia together with its international business, the revenues generated overseas now account for 85% of SingPost’s revenue and operating profit.
“This sets the stage for our next phase of growth as a pure-play international logistics enterprise,” explains group CEO Vincent Phang, who was speaking at the media briefing on March 19. “Our focus, which is central to the strategic review, is specifically on driving growth, generating adequate returns and creating shareholder value.”
One proposed strategy is reorganising itself into three business units: Singapore, Australia and International. Each unit will have its own management teams and balance sheets, and they will have the “agility and empowerment” to operate in its own markets and build on its respective core capabilities.
“With the clarity of the segmentation as such, investors will be able to have a clearer assessment of the business performance and valuation against comparable market and sector benchmarks in logistics, which is far more meaningful,” says Phang, referring to current reporting lines along business lines such as post and parcel, logistics and property.
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“The key driver of this change is that we are no longer a postal organisation. Each of our businesses is a logistics business in its own market,” adds group CFO Vincent Yik. The new segmental breakdown will also illustrate the size of each of the individual markets, he adds.
From scant overseas presence at the time of its listing more than two decades ago, SingPost’s operations in Australia now contribute half of the total revenue and operating profit for FY2023 ended March 2023 and is set to grow further.
Conversely, its Singapore operations reported an operating loss of $11 million in FY2023 mainly due to the legacy structure of the post office network, which was offset by the delivery business, which had a profit to the tune of $10 million. The number was before the recent lift in postage prices, which is in the black as at 3QFY2024, says Yik.
The numbers presented stood in contrast to the company’s domestic focus just a few years ago. For FY2021, the local post and parcel segment contributed about 52.9% to its total revenue of $1.4 billion.
“Now, certainly not helped by the [Covid-19] pandemic, that has changed and accelerated,” says Phang, who fully expects the domestic mail volume to further decline. “Today, what we have is a far larger, more diverse business. It is more international. The domestic business we have is a smaller segment within our businesses.”
The presence in Australia was built up via a series of acquisitions of existing local logistics firms, which Phang describes as a “very programmatic, very systematic and disciplined” approach.
For example, SingPost paid A$210 million ($186 million) last November for Border Express; it fully acquired the remaining 2% it did not already own in Freight Management Holdings (FMH) for A$13.3 million last December. Most recently, on March 1, SingPost paid A$120 million for M J Luff, an interstate transport and distribution company.
“Now we are in the process of integrating it into one big business,” he adds. “In terms of scale, we believe [the Australian business] has now gotten to a point where it’s self-sustaining. It is big, it has its own economic structure and we want to empower it as much as we can as owners and shareholders of this business to make sure that they do the right thing by the market and deliver the right economic outcome.”
Divesting SingPost Centre
SingPost aims to enhance its capital deployment strategy by implementing regular reviews of its financial performance and returns compared to predetermined targets. Each business unit is tasked with achieving a spread above the cost of capital.
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As part of its capital management initiative, it is looking at monetising its non-core assets and businesses to recycle its capital and take proceeds from divestments to pare debt or to invest in new growth. One such asset that is up for divestment is its flagship mixed-use development, SingPost Centre, valued at $1.09 billion as of Sept 30, 2023, larger than the company’s current market cap of just over $930 million. The possible divestment has been speculated for quite a few years. CapitaLand Investment, with its portfolio of REITs, is the existing manager of the retail portion of the property.
According to Yik, the building is already carried on SingPost’s books at market value and any gain will only be determined at the time of any potential divestment. When asked, the management declined to give further indications on when the divestment might take place. “There should be the element of the right timing,” says Phang.
Given the scale of its Australia business, Phang says “all options are open” when asked if there are plans to float it separately. “For us, this first phase of our strategic review and announcement… is [for the group] to offer a view of the businesses in their own right. If such an opportunity arises, it will be an option on the table for us to consider.”
Dividend policy
As part of its strategic review, SingPost has changed its dividend policy to pay out between 30% to 50% of its underlying net profit from FY2024/2025, lower than its previous policy of paying out between 60% to 80% of its underlying net profit.
Phang defends this new dividend policy. “As a public utility, I think that [the old] dividend yield probably made sense… It’s stable, it drives that constant, consistent yield as a dividend for investors. However, we are not — and I don’t think we are — that public utility anymore. We have oriented into a logistics industry… we have oriented into a growth [industry],” says Phang.
“For good reason, because we didn’t have any underlying support,” he adds, referring to the structural decline of mail. “The public utility needs to have a concept of some supported volume. Unfortunately, we didn’t have that, so the reorientation was clear. In reorientating, we looked at market industry comparables.
“In a growth market, you have to continue to invest not just in capex areas, but in [the] fleet, capabilities, digital technology and so on. That will be the balance of the obligations we have going forward,” he continues. “Clearly, we are focused on generating returns, but then from a returns standpoint, we need to be able to allocate that accordingly to fund the growth investments.”
Analysts not surprised
The outcome of the strategic review was unsurprising to CGS International’s Ong Khang Chuen and OCBC Investment Research’s Ada Lim. Meanwhile, UOB Kay Hian’s Llelleythan Tan noted that the new segments now “lend better understanding” to SingPost’s business performance, considering each market’s varied growth potential and different risk exposures.
All three brokerages have kept their “add” and “buy” calls and target prices. CGS is the most upbeat, with a target price of 58 cents. This is followed by OIR’s target price of 55.5 cents, while UOB Kay Hian rounds up the trio with its target price of 54 cents.
Ong of CGS estimates $2.5 billion worth of assets to be divested over the next three years, up from his earlier projection of $2 billion. “Non-core assets identified for capital recycling by SingPost include SingPost Centre and freight forwarding business Famous Holdings,” he adds. “SingPost is also exploring strategic partnership for equity financing to scale its fast-growing Australian logistics business and unlock shareholder value.”
Ong currently values Famous Holdings and SingPost’s Australian business at $1.3 billion in total, based on 10 times 2024 EV/Ebitda. He believes SingPost will focus on integrating its Australian unit in FY2025 after the recent acquisition of Border Express and the stake increase in fourth-party logistics (4PL) business FMH.
“Even without considering cross-selling potential, we estimate SingPost can derive cost synergies of $25 million annually within the next two years in Australia,” he notes.
“Meanwhile, SingPost’s Singapore unit has returned to profitability in 3QFY2023/2024 after implementation of a postage rate hike in October 2023; we believe there is room to rationalise the post office network to further lower fixed costs,” says Ong, referring to the rate hike from 31 cents to 51 cents.
UOB Kay Hian’s Tan believes that SingPost’s initiatives in bringing about commercial viability to its Singapore business while maintaining its postal service obligations and the merging of its postal office networks will help reduce operating costs for its domestic post and parcel segment.
In Australia, the analyst expects the group to “effectively leverage on Border Express’ network to strengthen its presence in Australia and bolster segmental earnings”.
At SingPost’s share price of 40.5 cents as at Tan’s March 18 report, the group’s market cap is around $911 million which is being “severely” undervalued by the market, says the analyst.
At this target price, SingPost is trading at 17 times its FY2025 P/E, slightly below –1 standard deviation (s.d.) to its long-term mean.
While OCBC Investment Research’s Lim would have liked to see more concrete financial targets, she notes that the journey has just begun for SingPost’s pivot into becoming a significant logistics player. “It will take time and resources for the company to act on its roadmap from the strategic review, and execution remains a key risk,” says Lim.
“In the near term, SingPost is not immune to global headwinds such as a trade slowdown, muted China exports, and weakening sea freight rates and volumes, though management remains optimistic about the growth of the integrated logistics market in Australia and the global cross-border e-commerce logistics market in the medium to long run,” she adds.
