Standard and Poor (S&P) Global Ratings analyst Pauline Tang has revised her outlook on Singapore Post (SingPost) to “negative” from “stable”.
In her report dated Dec 12, Tang says this revision reflects her view of “intensifying structural hindrances” to its postal and parcel business and the potential for sustained earnings weakness. This also coincides with SingPost's rating buffer being largely depleted following its acquisition of Australia-based FMH.
“The negative outlook reflects our expectations of weakening business prospects of SingPost's postal and parcel business and the likelihood that leverage will remain elevated in the next 24 months,” says the analyst.
S&P has also affirmed its BBB+ long-term issuer credit ratings on SingPost, as well as its BBB- issue rating on the $250 million senior perpetual securities guaranteed by the company.
Tang says that challenging operating conditions and structural headwinds are intensifying for the post and parcel business, weighing down SingPost earnings. “The pandemic has accelerated the structural decline in letter mail volumes in Singapore. Companies have moved toward online correspondence and reduced printed letter volumes. These behavioral changes persist post-pandemic,” she explains.
She adds that a labor shortage led SingPost to suspend its advertising mail services to focus on essential postal services early in the pandemic. For 1HFY2023 ending March 2023, mail volumes continued to weaken by 2% year on year.
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Tang expects elevated leverage to persist over the next three years, driven partially by segmental weakness. She is forecasting a debt-to-ebitda ratio of 3.4x to 3.8x in FY2023, 2.9x to 3.3x in FY 2024 and 2.4x to 2.8x in FY2025.
Rising costs, further exacerbating structural declines, have included high conveyance costs and operating expenses such as fuel and utilities. “Moreover, the loss of a major customer in the domestic e-commerce business accentuated a difficult earnings condition. For the first half of fiscal 2023, the postal and parcel segment recorded an operating loss of $12 million,” says the analyst.
In her view, the extent and timing of SingPost’s recovery remains uncertain. Tang says the improving lockdown situation in China should provide some relief and elevated air conveyance costs should normalise as air capacity resumes to its pre-pandemic level.
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Meanwhile, she notes that SingPost has implemented measures to improve its cost structure. For instance, it is chartering flights to reduce reliance on air freight rates. The company has strengthened the network of locker stations in Singapore to reduce manpower needs and lower last-mile delivery costs. The postal and parcel segment eked out a small operating profit in the second quarter of fiscal 2023, which Tang expects may carry over to subsequent quarters in FY2023.
SingPost is also shifting its strategy and business mix toward e-commerce and logistics in recognition of the structural difficulties facing the traditional postal business. “To counter a structural decline and increasing challenges in the postal business, SingPost has been stepping up its strategic expansion into logistics,” says Tang, citing its FMH acquisition.
However, she warns that the purchase of FMH has also depleted most of SingPost’s rating cushion, leaving limited capacity for additional significant investments. “While we forecast capital expenditure to be $15 million to $25 million in the next two years, the company plans to grow its market share in Australia through FMH. The Australian company made some small bolt-on acquisitions of less than S$10 million in the first half of fiscal 2023 to strengthen its service offering.”
The analyst says she believes that SingPost may have “multiple levers” to alleviate its constrained credit profile, with a history of undertaking initiatives to support its balance sheet. In Decemeber last year, SingPost divested General Storage, resulting in about $85 million of cash inflow. In addition, SingPost Group Treasury issued $250 million in perpetual securities in April 2022, which S&P has ascribed intermediate equity content — 50% equity and 50% debt — to those perpetual securities.
“The company also has some flexibility to adjust its shareholder returns to accommodate balance sheet weaknesses. We expect SingPost to carefully balance its growth appetite, cost management, and balance sheet strength amid increasing industry uncertainty,” says Tang.
Her downgrade scenarios include expecting SingPost earnings to continue declining, keeping leverage elevated and a projection of its debt-to-ebitda ratio to continue its trajectory to below 2.5x. “The rating could also be pressured by accelerating structural changes in its underlying business as SingPost repositions itself as a logistics player, such that profitability or leverage were to permanently weaken compared with industry peers.”
On the other hand, Tang says she could revise the outlook back to “stable” if SingPost demonstrates its ability to enhance profitability and strengthen competitive position such that it will counter the structural decline in the postal and parcel business. This will help the company's leverage to be more consistent with the 2.5x threshold commensurate with S&P’s BBB+ rating.
Shares in SingPost traded flat at 51.5 cents on Dec 13,
