UOBKH: Singapore Post (SPOST SP) – Hold Target Price $0.46

Nationalisation Of The Postal Segment Unlikely

Due to a secular decline in delivery volumes, the Singapore government mentioned that IMDA is considering allowing SPOST to introduce further postal rate increases to improve segmental profitability. Although no timeline was given, we expect the postal rate adjustments to occur in 3QFY24. We maintain HOLD with the same PE-based target price of S$0.46.

WHAT’S NEW

• Help incoming. During a parliamentary hearing in early-Jul 23, Singapore’s Minister of State and Communications mentioned that the government would consider allowing Singapore Post (SPOST) to introduce postage rate adjustments in response to declining domestic letter & mail volumes. Excluding a small 1-3% increase in Jan 23, postage rates have been kept constant since 2014. This announcement was made after SPOST initiated a strategic review of its domestic postal business amid a global secular decline in traditional letter & mail volumes coupled with SPOST’S post and parcel segment posting its first ever annual operating loss of S$15.9m in FY23. As discussions are still ongoing between Singapore’s postal regulator Infocomm Media Development Authority (IMDA) and SPOST, we opine that the postal rate adjustments would likely occur in 3QFY24/4QFY24.

• Eventual return to profitability. The cooperation between IMDA and SPOST was in line with our earlier expectations as we opined that the recent 1-3% postal rate increase in Jan 23 was insufficient to cover elevated operating costs, driven by inflation. With expected postal rate adjustments, we now reckon that the domestic postal & parcel (DPP) segment is nearing a bottom. Based on our FY24F estimates, assuming constant delivery volumes, we estimate that SPOST would have to raise basic and tracked postal rates by 1-2 cents (3-5%) and 5-6 cents (2-3%) respectively to break even. In our view, the additional revenue from the hikes would likely flow down to the bottom line, given no incremental increase in operating costs. We estimate an S$12-15m operating loss for DPP in FY24F.

• Balancing act. The proposed postal rate adjustments follow a global industry trend whereby national postal carriers have done multiple basic postal rate hikes to combat declining volumes. Some examples include the UK’s Royal Mail (~30% increase in two years), the United States Postal Service (~32% increase since 2019, 10% increase in the last six months) and the NZ Post (~30% increase in 2023). Although postal rate hikes may bring in additional revenue assuming constant volumes, this may instead hasten mailing volume decline as mail users cut down on mailing costs. As postal rates are regulated by the government, we reckon that SPOST may not be able to increase basic postal rates instantly by ~30% in line with global peers but instead implement gradual 5-8% rate increases, balancing commercial sustainability of the group while fulfilling its national obligations of providing essential domestic postal services.

STOCK IMPACT

• Addressing nationalisation. With the nationalisation of Singapore Press Holding’s media business in 2021, there has been market talk about the possibility of a similar move for SPOST’s letter & mail business. In our view, a divestment of its letter & mail postal business to the Singaporean government is unlikely in the near- to medium-term. Similar to global national postal peers, postal rate adjustments have been used globally as a first step in addressing the secular decline in letter & mail delivery volumes and ensuring profitability for their respective letter & mail segments. Excluding the recent 1-3% adjustment starting Jan 23, SPOST has not adjusted rates since 2014 and is only now catching up. However, several national posts such as the United States Postal Service, New Zealand Post and Australia Post have faced backlash from increased postal rate adjustments, particularly from businesses. As SPOST’s letter & mail segment is heavily dependent on businesses, higher postal rate adjustments may backfire in mitigating both the secular decline in delivery volumes and segmental profitability.

• Potential changes to service standards. Assuming postal rate adjustments are insufficient, we expect changes to service standards as the next step to reduce operating costs. In a bid to tackle elevated operating costs and lower volumes, the United States Postal Service lowered delivery standards from within three days to four-five days while the New Zealand Post reduced mail delivery in urban areas from six to three times a week. As a Public Postal Licensee, SPOST is currently adhering to strict delivery standards set by IMDA such as requiring 98% of basic mail to be delivered by the next working day. By relaxing such mailing service standards, SPOST would then be able to reduce operating costs and protect margins. Although it was noted that IMDA would continue to ensure that SPOST complies with current quality of service, we reckon that there may be changes to service standards if postal rate adjustments are unsuccessful.

• Consolidation and possible deregulation. Driven by inflationary cost push, SPOST may consolidate its postal branches and multiple sorting centres in the near-medium term to achieve greater economies of scale and lower overhead costs. Also, assuming relaxation of service standards and regulatory approval, we opine that SPOST may outsource the delivery of letter & mail to third-party logistical companies while the group solely operates the sorting segment, leading to better margins for the DPP segment.

• Unlikely last resort. If all else fails, a nationalisation of SPOST’s letter & mail business is possible to ensure continued postal services in Singapore. In our view, in such a case, SPOST may spin off the letter & mail business into a public governmental entity while the government would likely contract SPOST to operate the business via a cost-plus model, due to the complexity of operating a global postal company and lack of suitable alternatives. However, given that the Singapore government only fully liberalized the postal market in 2007, a nationalisation of SPOST’s letter & mail would likely be a last resort without first exhausting all available options as mentioned above, making it a long and drawn-out process. Furthermore, SPOST utilises the same postal network for its domestic ecommerce segment, a segment that SPOST believes in long-term, making it unlikely that SPOST would divest its letter & mail postal business and infrastructure.

EARNINGS REVISION/RISK

• No change to our earnings estimates due to the lack of clarity about the adjustments.

VALUATION/RECOMMENDATION

• Maintain HOLD and the same PE-based target price of S$0.46, pegged to the same PE 21.3x multiple, SPOST’s average long-term mean PE, to FY24F PATMI estimates. However, based on our SOTP valuation, we value SPOST at S$0.71, with the logistics and property segments valued at about S$1.8b and the mailing segment at 1x FY23 P/B. Assuming a S$1 valuation for the mailing segment, we would value SPOST at S$0.61. We think that the market is severely undervaluing both the logistics and mailing segment given that SPOST’s current market cap is only around S$1.0b.