Reviewing sustainability of postal services
- SingPost announced today that it is working with IMDA on a review of its Singapore postal business to ensure long-term commercial sustainability.
- Key discussion points include postage rate adjustments, as well as costs and operating model review, including optimisation of post office network.
- We see this as a step in the right direction, helping near-term share price sentiment given its post and parcel segment is loss-making. Reiterate Hold.
Working with IMDA to review sustainability of postal services
? Singapore Post (SingPost) announced today that it is working with Infocomm Media Development Authority (IMDA) on a fundamental review of its Singapore postal business, amid rapid digitalisation and a structural decline in mail volumes. The review is intended to strike a balance between long-term commercial sustainability of the company and providing essential postal services for the nation, SingPost said.
? During his speech in parliament yesterday, Senior Minister of State for Communications and Information Tan Kiat How said the government will consider allowing SingPost to introduce more frequent postage rate adjustments to better reflect costs of the letter mail business in the future. SingPost and IMDA will also jointly review costs and operating models of the postal services, including the optimisation of the post office network.
? The intention is to allow SingPost to remain commercially viable without requiring direct government funding, the minister said.
A step in the right direction, but a holistic approach is needed
? Recall that SingPost’s post and parcel segment recorded a full-year operating loss of S$15.9m in FY3/23 due to weaker delivery volumes and inflationary cost pressures, and management expects the segment to remain loss-making in FY3/24F.
? We think the latest newsflow represents a step in the right direction, which could help with share price sentiment in the near term. We believe that a holistic approach is needed to tackle the structural issues of postal decline — rate adjustments are only a partial solution and could backfire in potentially accelerating volume declines.
? We see potential for rationalisation of the post office network and/or sorting centres in Singapore to lower fixed overheads, which could also open up opportunities for SingPost to monetise its investment properties worth S$965m.
What would make us more positive?
? Given the unlikelihood of direct government funding, we would only turn more positive if we get: 1) more clarity on plans to merge existing sorting centres, which could lead to potential monetisation of SingPost Centre, or 2) faster-than-expected recovery of the international post and parcel business.
? Reiterate Hold as the pace of SingPost’s earnings recovery remains uncertain given the various macro headwinds. Our TP of S$0.55 is based on a blended valuation (P/E and SOP) methodology, as we think SingPost’s strategic review raises the potential for asset monetisation. Upside risks include a faster recovery of the IPP business and earnings accretive M&As. Downside risks include prolonged volume weakness for domestic post, and a further spike in operating costs due to inflation hurting margins.
