UOB Kay Hian analyst Llelleythan Tan has downgraded his recommendation on Singapore Post (SingPost) to “hold” in view of the strong headwinds experienced by the group.
In the 1QFY2023 ended June, SingPost reported a weak operating profit of $11 million, which was down by 46.7% y-o-y.
During the quarter, SingPost’s domestic postal segment underperformed as postal volumes dropped while the international postal segment saw elevated air freight costs.
The logistics segment saw higher consignment volumes due to the consolidation of Freight Management Holdings (FMH). The property segment benefitted from the relaxation of social distancing measures.
On this, the analyst expects the profitability of SingPost’s domestic parcel segment to take a “sharp hit” in the FY2023 due to the loss of a major e-commerce customer, which he assumes to be Shopee, along with the short-term normalisation of e-commerce volumes.
“Also, the segment is expected to experience margin compression as rising fuel, labour and utility costs eat into profitability,” he writes.
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“Based on our estimates, 1QFY2023 operating loss for [SingPost’s] domestic parcel and post (DPP) [segment] is around $15 million,” he adds.
Tan is also estimating SingPost’s international parcel and post (IPP) segment to see operating profit at breakeven level or at a small operating loss for the 1QFY2023 due to elevated costs. However, he notes that air freight rates should continue to soften gradually as global travel recovers, reaching near pre-pandemic levels in 1HFY2024.
The analyst has also pegged the operating profits of SingPost’s logistics and property segments at $16 million and $10 million respectively for the 1QFY2023.
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To this end, Tan has lowered his net profit forecasts to account for lower growth assumptions for the DPP segment, along with lower margin assumptions.
“We now forecast FY2022-FY2024 patmi at $36.1 million (from $82.5 million previously), $64.8 million (from $94.2 million previously) and $92.1 million ($108.5 million previously) respectively.
In addition to his downgraded recommendation, Tan has lowered his target price to 61 cents from 78 cents previously.
“We have pegged our P/E multiple to 21.3x, SingPost’s average long-term mean P/E, to SingPost’s average net profit for FY2023-FY2025. This is to account for SingPost’s gradual recovery in earnings,” he writes.
“However, based on our sum-of-the-parts (SOTP) valuation, we value SingPost at 79 cents, with the logistics and property segments valued at $1.6 billion. Given that SingPost’s market cap is at $1.5 billion, we think that the postal segment is being undervalued by the market. Any potential reversal in postal earnings could lead to valuation upside,” he adds.
As at 3.49pm, shares in SingPost are trading flat at 59 cents.
