Analysts are remaining neutral on Singapore Post (SingPost) S08 and are keeping their “hold” calls on the stock following its latest 3QFY2023 ended Dec 31, 2022, results announcement, which saw operating profit decline by 9.7% y-o-y to $33.9 million, despite revenue growing 13.4% y-o-y to $495.1 million.
The domestic postal segment continued its downtrend as postal volumes fell. This is amid e-commerce volumes pulling back across all of the group’s markets, as economies normalise shopping to offline channels and weaker consumer spending amid economic uncertainties.
The way CGS-CIMB Research analyst Ong Khang Chuen sees it, the group’s recovery is moving slower than expected. “While Ebit margin was weaker y-o-y due to operational deleverage from domestic post and parcel segment, we note that it continued to improve q-o-q as cost management efforts bore fruit,” says Ong, who has increased his target price to 58 cents from 55 cents.
Ong sees the group’s logistics sector as its key growth driver. Despite some pullback in CourierPlease’s business-to-consumer (B2C) last-mile delivery business and Famous Holdings’ freight forwarding business, logistics segment revenue grew y-o-y in 3QFY2023, led by continued growth of fourth-party logistic (4PL) business FMH.
SingPost targets to complete its Freight Management Holdings (FMH) stake increase by end-FY2023, following which it plans to accelerate its plans of reaping operating and cost synergies across its various Australian business lines (via increased collaboration), and potentially quicken its pace of investments in Australia (through FMH) to drive growth.
“Despite the weaker volumes yoy, we see green shoots of recovery for both its domestic and international post and parcel businesses,” says Ong.
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Excluding the impact from the loss of a major customer (since 1QFY2023), SingPost notes that volumes from its top three domestic ecommerce customers grew 3% y-o-y in 3QFY2023. “We think the memorandum of understanding (MoU) it signed with Lazada in December 2022 could help SingPost increase its share of Lazada’s delivery volumes ahead,” says Ong.
On the international front, the group notes that international post and parcel’s (IPP) high conveyance costs have abated with greater air capacity coming on stream, which helped improve margins and stabilise segment performance. It has seen early signs of recovery from China’s reopening ytd in 2023, and is working on regaining customers to regrow the revenue and scale of its IPP business.
“While we think the worse is over for SingPost, its pace of recovery remains uncertain given the various macro headwinds,” says Ong.
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UOB Kay Hian analyst Llelleythan Tan has similar sentiments on the stock, as he too has increased his target price to 60 cents from 58 cents.
Tan sees that challenges still remain for SingPost, as without the group’s major e-commerce customer and the short-term normalisation of e-commerce volumes, the analyst expects Domestic Post & Parcel (DPP) profitability to continue its downtrend despite the group implementing higher postage rates starting Jan 1.
“We reckon that the 1%-3% increases in postage rate are insufficient to cover rising costs, given that domestic headline inflation is estimated at 5.5%-6.5% for 2023,” says Tan.
Meanwhile, as global travel recovers, the group notes that its air conveyance costs have moderated sharply to 120%-130% of pre-Covid levels, coming down from 202% at end-2QFY2023. Management expects air conveyance costs to soften gradually back down to pre-Covid levels by 4QFY2024. Despite being slightly above pre-Covid levels, management noted the group is comfortable with current levels whereby it is now able to ramp up volumes to boost IPP revenue, albeit at lower margins.
Furthermore, with the removal of China’s zero-Covid policy at end-3QFY2023, depressed outgoing IPP postage volumes are set to recover, given that China is SingPost’s largest IPP contributor.
“As a proxy to China’s reopening, the international postal segment would benefit from lower air freight costs,” says Tan.
“Overall, we still opine that the IPP segment would recover from lower air conveyance costs and a recovery in IPP volumes, but reckon it would be a gradual recovery over three to four quarters instead of a sharp one, with volumes likely only ramping up in FY2025,” adds Tan.
As at 4.05pm, shares in SingPost are trading at 54 cents.
