SINGAPORE (May 15): UOB Kay Hian is keeping its “hold” recommendation on Singapore Post after the national postal service provider saw underlying net profit came in below expectations, falling 25% from a year ago.
In addition, the brokerage is lowering its target price to $1.37, from $1.46 previously, with a recommended entry price of $1.25.
“So far, the structural decline in its core mail segment has yet to be offset by its e-commerce logistics endeavours, where material losses at TradeGlobal have further clouded the group’s outlook,” says UOB lead analyst Thai Wei Ying.
SingPost sank into 4Q losses of $65.2 million after booking $208.6 million in impairment charges. Of these, $185 million were for its US e-commerce unit TradeGlobal, $20.5 million for Postea Inc., and $9.3 million for an industrial property at 3B Toh Guan Road East.
(See: SingPost sinks into the red in 4Q after booking TradeGlobal impairment)
“Measures have since been in place to improve TradeGlobal’s operating performance, such as warehouse automation and customer onboarding efforts,” Thai says in a report on Monday.
Instead of a projected profit of $9.4 million for the year, TradeGlobal suffered a $26 million loss in FY17. This was on the back of labour cost pressure, the loss of two key customers which accounted for around a third of its total revenue, and disruption in the US fashion retail industry.
As part of a turnaround plan, Thai believes there could be a potential downsizing of TradeGlobal.
At the same time, the analyst says the structural decline in SingPost’s postal business shows no sign of letting up.
“We believe the decline in domestic mail is not yet easing,” says Thai. “Going forward, we expect mail operating margins to remain suppressed as domestic mail revenue continues to be impacted by e-statements implementation and the shift to alternative online services.”
Meanwhile, SingPost’s logistics business is still taking time to ramp up, following the official opening of its $182 million Regional eCommerce Logistics Hub at Tampines Logistics Park in November last year.
Its largest eCommerce logistics investment in Singapore to date, the sprawling three-storey facility houses two warehousing floors, 150 simultaneous loading bays as well as an office block over a total built-up area of 553,000 sq ft.
(See: SingPost opens $182 mil ecommerce logistics hub)
“Operating profit dropped 39% year-on-year owing to the costs of developing its e-commerce logistics network, higher depreciation at the new e-commerce logistics hub as well as depressed industry freight rates and volumes,” says Thai.
With the challenges continuing to mount for SingPost, UOB is cutting its FY18-19 earnings estimates by up to 15%. However, it is still projecting a 3-year net profit CAGR of 11.2%.
“While we remain positive on SingPost’s long-term prospects, we believe near-term earnings will continue to be hampered by transformation costs,” says Thai.
As at 12.49pm, shares of SingPost are trading 7.5 cents lower at $1.32.
