UOBKH: Singapore Post – Buy Target Price $0.78 (Previous $0.87)

1Q22 Results Preview: Headwinds For The Post & Parcel Segment And E-commerce

SPOST has released an operational update for its 1QFY23 and responses to questions from shareholders for its recent AGM. The group faces significant headwinds for its domestic post & parcel segment with higher operating costs while international volume gets dragged by elevated air freight rates and the ongoing lockdowns in China. After the majority stake acquisition of FMH, Australia remains SPOST’s next strategic growth driver. Maintain BUY with a lower target price of S$0.78 (previously: S$0.87).

WHAT’S NEW

• Domestic post & parcel (DPP): Challenging quarter. Facing increasing costs, Singapore Post’s (SPOST) domestic post & parcel (DPP) segment is expected to experience margin compression as rising fuel, labour and utility costs eat into profitability. In line with expectations, volumes for SPOST’s traditional letter & mail business continue to decline, given Singapore’s secular trend of going paperless. Moving forward into 2QFY23, Singapore’s authorities is set to distribute a total of about 15m ART kits to all households in Singapore solely via SPOST, giving the DPP segment a well-needed boost to volumes. Costsaving initiatives such as electric-powered vehicles and new automation/sortation capabilities would also help support margins.

• Domestic e-commerce: Unpleasant surprise. A major e-commerce customer has insourced part of its own logistics, which we assume is Shopee, reducing SPOST’s domestic e-commerce volumes for 1QFY23. Driven by increasing adoption during COVID-19, growing e-commerce volumes have always offset falling letter & mail volumes for the past quarters. However, with the loss of Shopee, along with the short-term normalisation of e-commerce volumes, we expect DPP profitability to take a hit in FY23, dragged down further by rising operating costs.

• International post & parcel (IPP): No significant improvement. Even as air traffic into Singapore improves, SPOST noted that air conveyance costs remains elevated for 1QFY23, in line with expectations. We reckon this is 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. Furthermore, majority of these planes are headed towards tourist destinations which may not be SPOST’s target markets. Also, continued lockdowns in China have depressed outgoing IPP postage volumes with China being SPOST’s largest IPP contributor. Although we expect some recovery from 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.

• Property: Back to pre-pandemic levels. Not much was mentioned about the property segment other than being stable. With almost full occupancy at 96.6% and the relaxation of COVID-19 measures in Singapore, the segment is expected to perform well moving forward. A potential partial divestment of SingPost Centre could also be a strong catalyst.

• Logistics: Steady performer. SPOST mentioned that the logistics segment continued to perform well. With the completion of its majority stake acquisition of Freight Management Holdings (FMH) in 4QFY22, SPOST is set to increase and scale up the group’s logistics network in Australia. A full-year contribution from FMH is expected to boost the segment’s FY23 revenue and profitability significantly. The group 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. Famous Holdings is still expected to benefit from elevated sea freight rates caused by global supply chain disruptions.

EARNINGS REVISION/RISK

• We lower our FY22-24 earnings estimates, on the back of lower DPP and IPP volumes, along with higher operating costs assumptions. Our core PATMI forecasts for FY22-24 are S$82.5m (S$97.9m previously), S$94.2m (S$113.4m previously) and S$108.5m (S$127.6m previously) respectively.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower SOTP-based target price of S$0.78 (previously: S$0.87), We value: a) the mail business at 10.0x FY23F PE, b) the logistics business at 6.5x FY23F EV/EBITDA, both in line with peers’ average, and c) property at a cap rate of 5%.

• In our view, despite short-term headwinds, SPOST is on track for a strong but delayed recovery, driven by the growth in logistics and the long-term uptrend for e-commerce. 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 -1SD (18.5x FY23F PE) of its five-year mean PE (21.3x), we think that SPOST has significant potential upside at current attractive price levels. Our target price of S$0.78 implies a FY23F PE multiple of 21.2x, similar to its five –year mean PE.