Australia Earmarked As The Next Growth Engine
SPOST’s management provided more updates about the group’s current operations.
Domestic letter and mail volumes are expected to drop further while e-commerce
volumes will suffer a temporary dip as Singapore reopens. Air freight costs remain high
with more narrow-bodied aircraft transiting at Changi Airport and ongoing China
lockdowns dragging postal volumes. The logistics segment is set to grow due to the
full-year consolidation of FMH. Maintain BUY with a lower target price of S$0.87.
WHAT’S NEW
• Domestic letter and mail: No floor in sight. Volumes for domestic letter and mail are
expected to moderate further with no floor in sight, largely because going paperless is
becoming a secular trend. However, management noted that the decline in volumes is not
severe enough to result in a redesign of delivery networks and current letterbox allocations.
Coupled with lower volumes, Singapore Post (SPOST) is facing higher operating costs due
to inflation, and these are set to compress margins and drag down profitability. This is in line
with our previous expectations. Moving forward, SPOST has implemented cost-savings
initiatives such as new sorting machines and new initiatives to digitise this business.
• Domestic e-commerce: Short-term pullback. In line with our expectations, volumes for
domestic e-commerce are poised to soften slightly in the near term as Singapore has
relaxed most of its COVID-19 restrictions. Discretionary spending on e-commerce may also
drop slightly as inflation hits. Management noted that they are optimistic about the long-term
upward trajectory of e-commerce as increasing adoption ramps up, given that online
penetration in Singapore is lower compared to other industrialised countries. They re-iterated
that growing revenue from domestic e-commerce is expected to mitigate the decline from
domestic letter and mail over the medium-long term. Competitors have also not raised prices
even as higher costs from inflation impact margins.
• International Post & Parcel (IPP): Elevated air freight rates. Even as Singapore fully
reopened its international borders on 26 Apr 22, SPOST is still facing elevated air freight
rates, albeit improving slightly since end-Mar 22, according to management. This is largely
due to more narrow-bodied passenger aircrafts, instead of cargo planes, transiting at Changi
Airport, resulting in lesser belly hold cargo space that SPOST uses for its IPP postage. Also,
ongoing lockdowns in China have depressed outgoing IPP postage volumes with China
being SPOST’s largest IPP contributor. Although we expected some recovery from the
Singapore’s reopening, we opine it is still early days. Air freight rates should continue to
soften gradually as global travel recovers, reaching near pre-pandemic levels sometime in
1HFY24 (vs our previous expectations of 2HFY23/1HFY24).
• Logistics: Renewed focus on Australia. In line with our expectations, management has
earmarked Australia as SPOST’s next pillar for growth, with its majority stake acquisition of
Freight Management Holdings (FMH) set to increase and scale up the group’s logistics
network in the country. Also, a full-year contribution from FMH is expected to boost the
segment’s revenue and profitability significantly (S$178.7m revenue contribution in
4QFY22). The group also plans to focus its future capex spending on its Australian
operations by ramping up consignment volumes and driving synergies in Australia, which
would allow it to capitalise on the growing logistics market down under. Based on our
estimates, we expect the logistics segment to post robust growths in revenue (+25.3% yoy)
and operating profit (+47.3% yoy) for FY23. This is after impressive growths in FY22 where
both revenue (+61.6% yoy) and operating profit (+293.5% yoy) surged.
• Property: Back to pre-pandemic levels. Not much was mentioned about the property
segment. However, the fact that its retail segment is having full occupancy and its office
space is high at 93.5% occupancy as at end-FY22 bodes well for the segment.
EARNINGS REVISION/RISK
• We lower our FY22-24 PATMI estimates by 5-7%, on the back of higher operating costs
and longer-than-expected elevated air freight rates. Taking a conservative view, we now
expect air freight rates to return near pre-pandemic levels in 1HFY24 instead of
2HFY23/1HFY24 previously.
VALUATION/RECOMMENDATION
• Maintain BUY with a slightly lower SOTP-based target price of S$0.87 (S$0.90
previously). In our view, SPOST is on the verge of a strong recovery, driven by the growth
in e-commerce and logistics. Also, once air freight rates reach an optimal level sometime in
1HFY24, we expect SPOST to ramp up IPP volumes, which will help to boost overall
revenue. Hence, with an expected inflection point approaching and trading below -2SD
(15.4x FY23F PE) of its five-year mean PE (21.3x), we opine that SPOST has significant
potential upside at current attractive price levels.
SHARE PRICE CATALYST
• Pick-up in air travel.
• Lower-than-expected decline in domestic postal services.
• Earnings-accretive acquisitions.
