SINGAPORE (Aug 6): DBS is downgrading its recommendation on Singapore Post (SingPost) to “hold” from “buy” with a lowered target price of $1.28.
This came on the back of the group reporting that its 1Q18/19 earnings have dropped by 40.4% to $18.7 million from $31.4 million a year ago, due to an exceptional fair value loss on warrants from an associated company as well as higher tax expenses.
Revenue for 1Q18 was 3.3% higher at $372.3 million, compared to the restated 1Q17/18 revenue of $360.5 million, driven mainly by a 67.1 % increase in operating profit under the Property segment due to rental income from the SingPost Centre retail mall as committed occupancy improved.
See: SingPost reports 40.4% lower 1Q earnings on fair value loss & higher taxes; declares 0.5 cent dividend
The group’s revenue from international mail and last-mile deliveries also grew on higher eCommerce contributions, but margins were lower and thus resulted in a declined in Post and Parcel operating profit.
The Logistics and eCommerce segments also saw revenue decrease during the quarter.
In a Monday report, analyst Sachin Mittal says, “We project an 8% earnings CAGR over FY18-20F versus 14% earlier as we expect eCommerce segment breakeven to be delayed to FY21F from FY20F earlier due to the competitive pressures in the US business.”
TradeGlobal’s progression towards narrower losses will play a big role, according to the analyst.
The group’s foreign acquisitions – TradeGlobal and Jagged Peak – has caused operating losses to widen in 3Q17. Jagged Peak has lost a couple of key customers in the US, impacting revenue and profitability. In addition, labour shortages and higher wage costs have also impeded profit improvements.
Due to the disappointing results, SPOST took a $185 million impairment on TradeGlobal in 4Q17.
If these businesses’ losses escalates, the group’s bottom line could be depressed in the medium term.
“In the medium term, we believe that new areas of opportunities, such as food, grocery, and medicine delivery, as well as the potential divestment of SPC mall, could be catalysts,” adds Mittal.
Although the worst may be over for the group’s Postal and Logistics segments, the analyst says that SingPost would need to deliver double-digit earnings growth to sustain its rich valuations.
Currently, the stock has outperformed STI by 6.5% YTD, but Mittal believes that this may not continue going forward.
As at 12.12pm shares in SingPost are trading 1 cent higher at $1.26 or 2.0 times FY19 book with a dividend yield of 3.2%.
