UOB Kay Hian is keeping its “hold” recommendation on Singapore Post (SingPost) S08 with an unchanged target price of 46 cents.
This comes on the back of a recent parliamentary hearing in early-July, whereby the Minister of State and Communications mentioned that the government would consider allowing SingPost to introduce postage rate adjustments in response to declining domestic letter & mail volumes.
Excluding a small 1%-3% increase in January this year, postage rates have been kept constant since 2014. This announcement was made after the group initiated a strategic review of its domestic postal business amid a global secular decline in traditional letter & mail volumes coupled with its post and parcel segment posting its first ever annual operating loss of $15.9 million in FY2023 ended March.
“As discussions are still ongoing between Singapore’s postal regulator Infocomm Media Development Authority (IMDA) and SingPost, we opine that the postal rate adjustments would likely occur in 3QFY2024/4QFY2024,” says analyst Llelleythan Tan in his July 11 report.
Tan adds that this cooperation between IMDA and SPOST was in line with his earlier expectations as he opined that the recent 1%-3% postal rate increase in January was insufficient to cover elevated operating costs, driven by inflation.
“With expected postal rate adjustments, we now reckon that the domestic postal & parcel (DPP) segment is nearing a bottom. Based on our FY2024 estimates, assuming constant delivery volumes, we estimate that SingPost would have to raise basic and tracked postal rates by 1-2 cents (3-5%) and 5-6 cents (2-3%) respectively to break even,” says Tan, who also views that the additional revenue from the hikes would likely flow down to the bottom line, given no incremental increase in operating costs.
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The analyst estimates a $12-15 million operating loss for DPP in FY2024.
Meanwhile, the proposed postal rate adjustments follow a global industry trend whereby national postal carriers have done multiple basic postal rate hikes to combat declining volumes. Some examples include the UK’s Royal Mail (about 30% increase in two years), the United States Postal Service (about 32% increase since 2019, 10% increase in the last six months) and the NZ Post (about 30% increase in 2023).
Although postal rate hikes may bring in additional revenue assuming constant volumes, this may instead hasten mailing volume decline as mail users cut down on mailing costs. As postal rates are regulated by the government, Tan reckons that the group may not be able to increase basic postal rates instantly by about 30% in line with global peers but instead implement gradual 5%-8% rate increases, balancing commercial sustainability of the group while fulfilling its national obligations of providing essential domestic postal services.
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“Assuming postal rate adjustments are insufficient, we expect changes to service standards as the next step to reduce operating costs,” says Tan, who also believes that SingPost may consolidate its postal branches and multiple sorting centres in the near-medium term to achieve greater economies of scale and lower overhead costs amid inflationary cost push.
Also, assuming relaxation of service standards and regulatory approval, Tan opines that the group may outsource the delivery of letter & mail to third-party logistical companies while it solely operates the sorting segment, leading to better margins for the DPP segment.
If all else fails, a nationalisation of SingPost’s letter & mail business is possible to ensure continued postal services in Singapore.
“In our view, in such a case, SingPost may spin off the letter & mail business into a public governmental entity while the government would likely contract SingPost to operate the business via a cost-plus model, due to the complexity of operating a global postal company and lack of suitable alternatives,” says Tan.
However, given that the Singapore government only fully liberalised the postal market in 2007, a nationalisation of SingPost’s letter & mail would likely be a last resort without first exhausting all available options as mentioned above, making it a long and drawn-out process.
Furthermore, SingPost utilises the same postal network for its domestic ecommerce segment, a segment that it believes in long-term, making it unlikely that the group would divest its letter & mail postal business and infrastructure.
Shares in SingPost closed 5.38% higher on Jul 12 at 49 cents.
