UOB Kay Hian analyst Llelleythan Tan has kept his “buy” rating on Singapore Post (SingPost) ahead of the company’s results for the FY2022 ended March.
Tan’s positive outlook comes as he expects the company to post strong y-o-y growths in its revenue and PATMI for the year, after the low base in the FY2021.
As a sign of his confidence, Tan has upped his target price estimate to 86 cents from 78 cents previously.
“We value: the mail business at 10.0x FY2023 P/E (12x FY2022 P/E previously), logistics business at 7.0x FY2023 EV/EBITDA (8.0x FY2022 EV/EBITDA previously), both in line with peers’ average, and property at a cap rate of 5%,” writes Tan.
In his report, Tan sees the easing of Covid-19-related measures by the Singapore government as beneficial for the company.
The easing of the measures are two-pronged – one at the level of international travel and the other regarding domestic social distancing.
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From April 26, all fully-vaccinated travellers will be able to enter Singapore without quarantining and the need for a pre-departure Covid-19 test.
Under the new Vaccinated Travel Framework (VTF), Singapore’s government has also removed the quota on the number of daily arrivals and the approval process for all travellers. This is in hopes to restore air travel to 50% of pre-Covid-19 levels by the end of this year.
Next, there will no longer be a cap on group sizes for gatherings in Singapore, in addition to no safe-distancing is required among individuals. Moreover, meetings, incentive travel, conferences and exhibitions (MICE) events and sporting events can restart, with mask-wearing being optional outdoors and all employees allowed to return to the office.
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As a result, tourist arrivals, footfall in retail malls and physical occupancy of offices are expected to improve as social mobility increases from the relaxed social measures.
At this juncture, the number of commercial aircraft movements has improved since Singapore reopened its international borders, with figures from February and March up approximately 62% y-o-y respectively. “Although this is still at 35%-40% of pre-Covid-19 levels, it is expected to improve to 50% by the end of this year,” Tan says.
Greater cargo capacity and lower mail tonnage are likely to lead to air freight costs dropping, reducing volume-related costs for international postal companies like SingPost.
Recovery in earnings due to logistics segment and full recovery from property segment
Tan therefore expects the company’s FY2022 revenue and core PATMI to grow by 5.5% y-o-y and 29.8% y-o-y respectively, boosted by strong outperformance from the logistics segment along with a full recovery from the property segment.
“The post & parcel segment, dragged by elevated air freight rates in FY2022, is expected to post a y-o-y decline as volumes and revenue for International Post & Parcel (IPP) drop,” he writes.
Earnings for SingPost’s domestic post and parcel (DPP) segment are expected to rebound, particularly via growth in e-commerce revenue, which has already offset the decline in letter mail. According to Tan, this trend is expected to continue.
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For 1HFY2022, the overall post & parcel operating profit was stable on a y-o-y basis, excluding the rebates from Jobs Support Scheme (JSS) in 1HFY2021.
“Since the IPP segment has been operating at a breakeven level since the Covid-19 pandemic started, this implies that growth in domestic e-commerce operating profit is starting to offset the decline in operating profit from domestic letter and mail,” Tan says. “We opine that as e-commerce becomes a secular trend, rising profit from the domestic e-commerce is expected to help boost post & parcel overall earnings in FY2023 and beyond.”
A gradual recovery is also in sight for the IPP segment with air conveyancing costs on the decline.
As it is, the current air conveyance costs for SingPost have now come down to 170%-175% of pre-Covid-19 levels.
“Additional freight capacity from the new VTF would help soften air conveyance costs further but we believe it would be a gradual decline over two to three quarters instead of a sharp decline,” says the analyst, considering how Changi Airport will have to rehire due to reduced manpower and current travel capacity only being at 35%-40% of pre-Covid-19 levels.
As air freight costs make up 75%-80% of volume-related expenses and 40%-50% of total operating costs, the company has been operating the IPP segment at a breakeven level due to the elevated rates.
The way Tan sees it, the company might start increasing its IPP volume once air freight costs reach a “commercially optimum” level, which might take place sometime in 2HFY2023.
“With Changi Airport’s status as a regional air hub, along with lower air freight costs, this would help boost IPP revenue when air travel recovers closer to pre-Covid-19 levels, as about 90% of SingPost’s IPP revenue comes from transshipment revenue,” he writes.
For FY2022, the analyst estimates a drop in SingPost’s post & parcel segmental revenue and operating profit by 11.0% y-o-y and 42.3% y-o-y respectively, dragged by lower IPP revenue and decreasing domestic letter and mail.
“The reason for a larger percentage drop in operating profit is due to both IPP and domestic letter and mail segments having greater operating margins as compared with domestic e-commerce,” he says.
For SingPost’s property segment, occupancy rates at SingPost Centre remain high and seem to have returned back to Covid-19 levels, with its retail segment having full occupancy and its office space seeing 95.7% occupancy. According to management, new tenants are in the process of being secured for their offices.
The company however continues to anticipate some downward pressure on rents as firms start to scale down.
“For FY2022, we expect segmental revenue and operating profit to reach pre-Covid-19 levels, increasing by 2.0% y-o-y and 9.9% y-o-y respectively, backed by higher footfall and tenant sales as social distancing measures ease off,” says Tan.
Similarly, SingPost’s logistics segment is looking positive. In his report, Tan says he expects the segment to record ‘supernormal’ earnings.
In spite of the Omicron outbreak in 3QFY2022, SingPost saw consignment volumes growing by 7% y-o-y, contributed by new volume from Freight Management Holdings (FMH), an Australian logistics company acquired by SingPost in October 2020.
Subsidiaries under SingPost have been performing well too, with volumes at CouriersPlease remaining stable y-o-y in spite of “work disturbances”, and Famous Holdings benefiting from higher volumes and elevated sea freight rates amid ongoing supply chain disruption. However, sea freight rates are expected to soften slightly in FY2023.
With this, the analyst expects FY2022 logistical segmental revenue and operating profit to increase by 25.7% y-o-y and 266.5% y-o-y respectively.
Tan has increased his earnings estimates by 1% to 3% for FY2022 to FY2024 to account for the earlier-than-expected reopening of Singapore’s borders.
“Our core PATMI forecasts for FY2022 to FY2024 are $78.0 million ($76.4 million previously), $94.8 million ($93.8 million previously) and $116.8 million ($113.7 million previously) respectively,” he writes.
To sum up, Tan says, “We reckon that SingPost is on the verge of a strong recovery, driven by the growth in ecommerce. Once air freight rates reach an optimal level sometime in 2HFY2023, we expect SingPost to ramp up IPP volumes, which will help to boost overall revenue.”
“Therefore, with an expected inflection point approaching and trading at slightly above -1 standard deviation to its five-year mean P/E, we opine that SingPost has significant potential upside at current attractive price levels,” he adds.
SingPost will be announcing its results on May 13.
As at 12.17pm, shares in SingPost are trading at 0.5 cents lower and 0.7% down at 72 cents at a FY2022 P/B ratio of 1.2x and dividend yield of 3.6%.
