CGS-CIMB analyst Ong Khang Chuen has downgraded his recommendation for Singapore Post (SingPost) from “add” to “reduce” with a target price (TP) of 55 cents from the previous target of 80 cents, following its underwhelming 1QFY2023 results.
Ong believes SingPost’s net profit could remain dragged in the near-term until its international post and parcel (IPP) segment shows stronger signs of recovery. His 55 cent TP is based on 15.8x FY2023 P/E, 1 standard deviation (s.d.) below SingPost’s five-year historical average, and lowered from 18.8x due to “near-term headwinds”.
SingPost’s ebit of $10.6 million in 1QFY2023, a 47% year-on-year (y-o-y) decrease, came in below expectations at 9% of both Ong and Bloomberg consensus’ FY2023 expectations, despite profit guidance in July 2022 already signalling a tough operating environment for Singpost’s post and parcel business — which entered into an operating loss position during the quarter.
International post and parcel (IPP) volumes fell 33% y-o-y in 1QFY2023, impacted by supply chain disruptions from China lockdowns and continued elevated air conveyance costs, according to the analyst.
“We believe that IPP volumes should recover in the upcoming quarters given incremental air capacity improvement through Changi Airport and moderation of air conveyance costs towards the end of 1QFY2023. However, the pace of recovery could be gradual in the near-term given continued strict Covid-related controls in China and weaker cross-border volumes year-to-date (ytd) due to changes in the European Union’s VAT rules,” he writes.
Meanwhile, domestic post and parcel (DPP) is likely to remain challenged given the deceleration in e-commerce growth with post-Covid normalisation and a tougher competitive landscape for last mile e-commerce delivery with aggressive competitors and Shopee insourcing part of its logistics, says Ong.
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Although strong growth in domestic e-commerce volumes have been able to successfully offset traditional letter mail declines in FY2022, he believes that this trend will be difficult to repeat in FY2023, with DPP already down 26% y-o-y in the first quarter.
“Given the high fixed operating leverage nature of DPP, our FY2022 to FY2024 earnings per share (EPS) is lowered by 16.4% to 24.5% on the back of weaker volume assumptions,” Ong says.
Positively, logistics strength helped lead SingPost’s revenue to rise 35% y-o-y in 1QFY2023, driven by both organic growth as well as consolidation of Freight Management Holdings (FMH). The company plans to further expand its reach in the Australian market and extract operational synergies across entities, with Ong forecasting the segment’s operating profit to rise 28.5% y-o-y to $57 million or 58% of the group in FY2023.
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Ong’s de-rating catalysts include tougher competition in the last mile delivery space causing further DPP weakness, while his upside risks include earnings-accretive mergers and acquisitions and easing Covid-19 restrictions in China or sharp decline in conveyance costs aiding stronger IPP volumes recovery.
Shares in SingPost were trading 2 cents or 3.23% down at 60 cents at market close.
