Pushing back recovery expectations
- SPOST expects its Post and Parcel segment to see operating losses in 1Q23F, while other segments continued to perform well.
- IPP recovery was hindered by China lockdowns which caused conveyance costs to remain elevated, but we expect an improvement in coming quarters.
- Focus of 1Q business update will be on how SPOST plans to navigate headwinds for its DPP business. Maintain Add with a lower TP of S$0.80.
1QFY3/23F: Post and Parcel segment facing headwinds
Based on its preliminary assessment of accounts, SPOST expects its Post and Parcel segment to report an operating loss in 1QFY3/23F due to challenging operating conditions. On the other hand, SPOST notes that its Logistics segment continued to perform well, while the Property segment remained stable.
China lockdowns temporarily hindered IPP business recovery
SPOST’s International Post and Parcel (IPP) business saw continued headwinds despite incremental air capacity improvement through Changi in recent months. SingPost cited 1) supply chain disruptions from China lockdowns and 2) continued elevated air conveyance costs as key challenges faced in 1QFY23F.
DPP business unable to turn the tide
Meanwhile, the Domestic Post and Parcel (DPP) segment continued to face structural impact, with traditional letter mail volumes further declining in 1QFY23F. While strong growth in e-commerce volumes have been able to successfully offset traditional letter mail declines over the past few quarters, we believe this trend is difficult to repeat in FY23F given 1) deceleration in e-commerce growth with post-Covid normalisation and 2) tougher competitive landscape for last mile e-commerce delivery with aggressive competitors and Shopee insourcing part of its logistics (with Shopee Express). At the same time, operating costs rose, impacted by fuel, labour and utilities.
Cut FY23-25F EPS by 6.0%-11.3%
While we have anticipated near-term challenges which could hinder IPP business recovery (China lockdowns, early recovery of flight volumes mainly concentrated on narrow body aircraft to tourist destinations), we were negatively surprised by operating losses for the Post and Parcel segment in 1Q. We believe this implies weakness in DPP volumes (given the high fixed cost nature of the business). Thus, we lower our volume and margin assumptions for DPP, and cut our FY23-25F EPS by 6.0%-11.3%.
Maintain Add with lower TP of S$0.80
Maintain Add; we expect earnings to improve in coming quarters, driven by recovery of the IPP segment. With the EPS cuts, our TP is lowered to S$0.80, still based on 18.8x CY23F P/E (0.5 s.d. below historical average). Re-rating catalysts include earnings-accretive M&A and newsflow on China reopening. Monetisation of its real estate portfolio (c.S$1bn) could also be a longer-term catalyst. Downside risks include tougher competition in the last mile delivery space causing further weakness in DPP volumes.