Singapore Post - UOB Kay Hian 2022-11-04: 1HFY23 Mixed Results, Logistics Outperforms But Dragged By Post & Parcel

Singapore Post - 1HFY23 Mixed Results, Logistics Outperforms But Dragged By Post & Parcel

SINGAPORE POST LIMITED (SGX:S08)

SingPost reported strong top-line growth (+31.1% y-o-y) but weak operating (-19.1% y-o-y) and net profits (-64.7% y-o-y).
- The domestic postal segment fell short as e-commerce volumes dropped while the international postal segment continued to see lower volumes.
- The logistics segment saw robust growth due to the consolidation of FMH.
- The property segment benefitted from the relaxation of social distancing measures.
We maintain HOLD on SingPost with a lower PE-based target price of S$0.52 (S$0.61 previously).

For 1HFY23, Singapore Post (SingPost, SGX:S08)'s revenue (+31.1% y-o-y) and operating profit (-19.1% y-o-y) were in line with expectations despite challenging headwinds, accounting for 53% and 67% of our full-year forecasts respectively. The strong growth in revenue was led by a full half-year contribution from FMH (Freight Management Holdings).
However, SingPost reported a PATMI loss of S$9.9m, largely due to an exceptional S$21.0m liability charge on FMH. Excluding this charge, underlying PATMI would have been S$13.2m (- 64.7% y-o-y), forming 36.6% of our full-year forecasts and coming in below expectations.
SingPost declared an interim 1HFY23 dividend of 0.18 cents, at a 30% dividend payout ratio (1HFY22: 0.5 cents). See SingPost's Dividend History.
Softer volumes as headwinds bite. 2QFY23 volumes for the domestic post & parcel (DPP) segment were lower y-o-y as both e-commerce (-34.6% y-o-y, +7.8% q-o-q) and letter & printed papers fell (-1.5% y-o-y, -1.9% q-o-q). International post & postal (IPP) volumes also moderated (-15.2% y-o-y, +3.7% q-o-q) as sporadic lockdowns persisted in China, coupled with elevated air conveyance costs. Consignment volumes in Australia fell slightly (-3.8% y-o-y, +4.2% q-o-q), as the e-commerce volumes softened, coming off pandemic highs.

1HFY23 Post and Parcel revenue fell (-19.6% y-o-y, -11.8% h-o-h) and had an operating loss of S$12.1m (1HFY22 profit: S$11.3m). These accounted for 46.7% and 39.3% of our full-year forecasts, slightly below our expectations. Higher operating costs such as fuel and labour costs dragged down overall margins.
Management stated that discussions with government regulators to increase postage rates are still ongoing, and if approved, would help to narrow operating losses.

Revenue for DPP (-12.0% y-o-y, -11.6% h-o-h) and DPP e-commerce (-24.5% y-o-y, -22.3% h-o-h) moderated sharply in 1HFY23, dragged by lower y-o-y volumes for both SingPost’s traditional letter & mail business and a loss of a major customer in 1QFY23 for the domestic e-commerce segment. Excluding the major customer, e-commerce volumes would have increased from new customer account wins.
On a q-o-q basis, 2QFY23 saw an operating profit of S$0.2m as compared to a loss of S$12.3m in 1QFY22, driven by better cost control and higher q-o-q volumes.

IPP revenue (-24.3% y-o-y, -12.0% h-o-h) fell in 1HFY23, as persistent lockdowns in Chinese cities affected volumes. China’s ongoing zero-COVID strategy has depressed outgoing IPP postage volumes with China being SingPost’s largest IPP contributor and origin market.
SingPost also noted that air conveyance costs have started to soften, albeit still at elevated levels, as Singapore’s international borders have fully reopened. However, we opine that current air conveyance costs are still too elevated for any ramp-up in IPP volumes.
Furthermore, with no indications of China planning to ease its zero-COVID policy, we reckon the IPP segment is expected to face depressed volumes moving forward.

For 1HFY23, revenue (+79.4% y-o-y, +10.0% h-o-h) and operating profit both surged (+155.9% y-o-y, +47.7% h-o-h) due to a strong full half-year contribution from FMH since its acquisition, accounting for 56.4% and 63.6% of our full-year forecasts respectively and coming in above our expectations.
Robust organic and inorganic growth for FMH led to the sturdy performance while freight forwarding revenue grew (+13.3% y-o-y, -13.6% h-o-h) despite moderating sea freight rates. Due to FMH’s strong performance, FMH was revalued at a higher valuation in 1HFY23.
As SingPost only owns 51% of FMH, the consequent effect of the higher valuation is a fair value charge of S$21.0m, accounting for the other 49% stake SingPost does not own. As FMH is expected to continue seeing an uptrend, we opine that FMH would be revalued at an even higher valuation, thus incurring additional charges moving forward.
SingPost is exploring acquiring the rest of FMH with a put option of 23% stake in FMH which may be exercised by end- 2HFY23.

Despite declining y-o-y, revenue would have increased 4.6% y-o-y while operating profit would have been flat y-o-y if we exclude the divestment of its self-storage business. As Singapore reopened its borders, footfall increased 22.7% y-o-y while tenant sales surged 34.5% y-o-y.
1HFY23 occupancy rates at SingPost Centre remained stable as the retail segment maintained its near-full occupancy (99.7%) while the office segment improved slightly to 95.5% (94.5% in 1QFY23).

We reduce our PATMI forecasts for SingPost, accounting for the revaluation charge and lower postal volumes. We now forecast FY22-24 PATMI at S$13.9m (S$36.1m previously), S$25.5m (S$64.8m previously) and S$64.8m (S$92.1m previously) respectively.
Maintain HOLD recommendation on SingPost with a lower PE-based target price of S$0.52 (previously: S$0.61), pegged to the same P/E multiple of 21.3x, SingPost’s average long-term mean P/E, to SingPost’s average core net profit for FY22-24.
Based on our SOTP-based valuation, we value SingPost at S$0.68, with the logistics and property segments at ~S$1.5b. Given SingPost’s ~S$1.2b current market cap, we believe the postal segment is being undervalued by the market. Any potential reversal in postal earnings could lead to valuation upside.
Catalyst: Changes in China’s zero-COVID policy, lower-than-expected decline in domestic postal.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-04

Read also UOB's most recent report:
2023-01-13 Singapore Post - Expanding Down Under.

Price targets by 2 other brokers at SingPost Target Prices.
Listing of research reports at SingPost Analyst Reports.