Singapore Post - UOB Kay Hian 2023-01-13: Expanding Down Under

• SingPost announced that the group plans to acquire another 37% stake in FMH, increasing its stake to 88% and expanding its operations in Australia.
• To combat higher operating costs, SingPost has also increased postage rates across its DPP segment. China’s relaxation of its COVID-19 policies provides favourable tailwinds for its IPP segment that has faced depressed volumes.
• We maintain HOLD recommendation on SingPost with a slightly higher target price of S$0.58 (S$0.52 previously).

SingPost to increase stake in FMH.

• Singapore Post (SingPost, SGXS08) announced that the group has entered into a sale and purchase agreement to acquire an additional 37% stake in Freight Management Holdings (FMH), taking its total stake to approximately 88% post-acquisition. This is in line with SingPost’s key strategy to expand its overseas logistics operations and accelerates the group’s plan for eventual full ownership of FMH.
• Pending SGX approval, the acquisition deal would be completed in 4QFY23 (1Q23), at a consideration of A$175.4m (about S$161.5m) which would be fully funded by internal cash reserves/bank loan facilities.
• Given the robust operating profit growth that FMH possesses, the acquisition is expected to be earnings accretive and would help boost SingPost’s profitability from 1QFY24 onwards.

Higher postage fees for domestic post and parcel (DPP) segment

• To combat elevated operating costs and the recent GST increase, SingPost has increased delivery postage rates for most of its services from the domestic post and parcel (DPP) segment. Starting 1 Jan 23, postage rates for its products and services such as basic mail letterbox delivery to Speedpost delivery have increased by 1-3% and are set to increase again by another 1-3% from 1 Jan 24 onwards.
• Facing inflationary pressures, the higher postage rates are expected to support compressing margins that the DPP segment has been facing. However, in our view, we reckon that the higher postage rate increases are insufficient to cover rising costs, given that domestic headline inflation is estimated at 6.5-7.0%/5.5-6.5% for 2022/2023 respectively.

International post and parcel (IPP) segment to see better days.

• China ended most of its nationwide Zero-COVID policies in a bid to boost its economy and transition into COVID-19 endemicity. After three years of self-isolation, China lifted restrictions on its international borders whereby inbound travellers are now able to enter the country quarantine-free. Although China’s borders remain closed to tourists for now, we expect China to eventually fully reopen from 1H23, which is positive for SingPost’s international post and parcel (IPP) segment.
• Without sporadic COVID-19 lockdowns in key manufacturing hubs, outgoing international post and parcel (IPP) postage volumes are expected to recover, given China being SingPost’s largest IPP contributor. However, there is currently limited international flight capacity in and out of China which we reckon may take ree quarters before flight capacity returns to pre-COVID-19 levels as travel demand recovers.

Domestic post and parcel (DPP): Unlikely to stem decline.

• Despite 1-3% higher postage rates, we reckon that it is insufficient to cover rising costs and normalising DPP volumes. Based on our estimates, DPP letters & printed paper quarterly volumes would continue posting single-digit y-o-y declines, while normalising ecommerce demand would also drag overall DPP segmental revenue.
• We estimate that FY23 DPP ecommerce and letters & printed paper volumes should fall by about 25% y-o-y and about 3% y-o-y respectively. However, 3QFY23 may see a q-o-q increase in DPP volumes, being SingPost’s seasonally strongest quarter.
• Despite higher postage rates being positive, additional postage rate hikes are needed to help support compressed margins and sliding DPP volumes, in our view.

International post and parcel (IPP): Travel is back.

• Air conveyance costs are poised to drop in 3QFY23, backed by the holiday season and elevated travel demand. Flight capacity coming into Changi Airport is near 75% of pre-pandemic levels and is expected to improve further with China’s international borders reopening a strong catalyst.
• Before the pandemic, air travel between Singapore and Mainland China was the second largest contributor to Changi Airport’s passenger volume, forming 10.9% of the total in 2019. Currently near 5% of pre-pandemic levels, we expect flights capacity between China and Singapore to gradually recover moving forward, boosting IPP volumes.
• However, in the short term, we opine that more narrow-bodied passenger aircrafts, instead of cargo planes, would be transiting at Changi Airport to cater to overwhelming travel demand, resulting in lesser belly hold cargo space that SingPost uses for its IPP postage. We estimate a ramp up in IPP volumes in 2HFY24 once flight capacity from China returns to near pre-pandemic levels.

Logistics: Revenue growth engine.

• With SingPost’s stake increasing from 51% to 88%, the increased stake in FMH would boost our current FY24 revenue and net profit estimates by 11% and 106% respectively. Furthermore, the recurring redemption liability charge that SingPost incurs for the minority shareholders in FMH is set to decrease given SingPost’s larger stake after the acquisition.
• We estimate that the redemption charge would drop from $35m- 40m in FY23 to S$5m-10m in FY24. Famous Holdings is set to post robust revenue in FY23 although potential downside may come from the normalisation of sea freight rates.

Property: Occupancy rates remain stable.

• As Singapore reopened its borders and entered COVID-19 endemicity, we expect footfall and tenant sales to remain robust. Occupancy rates at SingPost Centre have been stable as the retail segment maintains its near-full occupancy (99.7% in 1HFY23) while the office segment improved slightly to 95.5% in 1HFY23.

SingPost – Earnings forecast revision & recommendation

• We increase our FY24-25 revenue and net profit forecasts for SingPost, accounting for the new increased stake in FMH. We now forecast FY24-25 revenue at S$2,208.3m (S$1,995.4m previously) and S$2,299.0m (S$2,065.8m previously) respectively, while increasing our PATMI forecasts to S$52.7m (S$25.2m previously) and S$76.4m (S$64.8m previously) respectively. We leave our FY23 forecasts unchanged.
• Maintain HOLD recommendation on SingPost with a slightly higher PE-based target price of S$0.58 (S$0.52 previously). We have pegged our P/E multiple to the same 21.3x multiple, SingPost’s average long-term mean P/E, to SingPost’s average PATMI forecasts for FY23-25. This is to account for SingPost’s gradual recovery in earnings.
• However, based on our SOTP-based valuation, we value SingPost at S$0.70, with the logistics and property segments valued at about S$1.6b. Given that SingPost’s market cap is at around S$1.2b, we think that the postal segment is being undervalued by the market. Any potential reversal in postal earnings could lead to valuation upside for SingPost.
• Catalyst:
  • Change in China’s COVID-19 policy.
  • Lower-than-expected decline in domestic postage.