Maintain 'buy' for Singpost with reduced TP of 78 cents as it makes 'strong but delayed recovery': UOB Kay Hian

UOB Kay Hian analyst Llelleythan Tan believes Singpost has significant potential upside at current attractive price levels.

UOB Kay Hian has maintained its “buy” call for Singapore Post (Singpost), despite facing significant challenges in the 1QFY2023 ended June, with a lower target price (TP) of 78 cents from 87 cents previously.

The company released its business update for the quarter on July 15.

In a report dated July 22, analyst Llelleythan Tan says that with Singpost’s recent operational update for 1QFY2023, the company faces “significant headwinds” for the domestic post and parcel (DPP) segment with higher operating costs, while its international volume segment contends with elevated air freight rates and the ongoing lockdowns in China.

Despite these short-term challenges, he expects Singpost to make a “strong but delayed recovery”. Anticipating an approaching inflection point that will see Singpost trading below its value, he believes that the company has significant potential upside at current attractive price levels.

“Facing increasing costs, Singpost’s DPP segment is expected to experience margin compression as rising fuel, labour and utility costs eat into profitability. In line with expectations, volumes for Singpost’s traditional letter and mail business continue to decline,
given Singapore’s secular trend of going paperless,” writes Tan.

Adding more to Singpost’s DPP losses, a major domestic e-commerce customer — which Tan believes to be Shopee — has insourced part of its logistics, reducing Singpost’s domestic e-commerce volumes for 1QFY2023, which have previously offset falling letter and mail volumes, driven by increasing adoption during Covid-19 in the past several quarters.

“With the loss of Shopee, along with the short-term normalisation of e-commerce
volumes, we expect DPP profitability to take a hit in FY2023, dragged down further by rising
operating costs,” says Tan

However, the analyst also notes that moving into 2QFY2023, the Singapore government is set to distribute a total of about 15 million (antigen rapid test) ART kits to all households in Singapore solely through Singpost, giving its DPP segment a “well-needed boost” to volumes. Cost-saving initiatives such as electric-powered vehicles and new automation and sortation capabilities would also help support margins, says Tan.

Meanwhile, even as air traffic into the country improves there remains no significant signs of improvement for Singpost’s international post and parcel (IPP) segment. At Singpost’s recent attorney-general meeting (AGM), the company noted that air conveyance costs remains elevated for 1QFY2023, in line with expectations. Tan believes this is due to more passenger aircrafts instead of cargo planes transiting at Changi Airport, resulting in lower cargo space used by Singpost for IPP postage.

Tan adds that a majority of these planes are headed towards tourist destinations which may not be Singpost’s target markets, while China’s continued lockdowns have depressed outgoing IPP postage volumes with China being Singpost’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 1HFY2024,” he explains.

Looking across to Singpost’s property segment, which it claims is “stable”, Tan believes that a partial divestment of SingPost Centre could be a strong catalyst for the company with almost full occupancy at 96.6% and the relaxation of Covid-19 measures in Singapore.

A bright spot for Singpost remains its logistics segment, with Singpost completing its majority stake acquisition of Freight Management Holdings (FMH) in 4QFY2022, putting Singpost in position 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 FY2023 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,” writes Tan.

He notes that Singpost’s “strong but delayed” recovery will be driven by the growth in logistics and the long-term uptrend for e-commerce. Once air freight rates reach an optimal level in 1HFY2024, Singpost is expected to ramp up international post and parcel volumes, which will help to boost overall revenue, writes the analyst.

Tan values the mail business at 10.0x FY2023 P/E, the logistics business at 6.5x FY2023 EV and Ebitda, both in line with peer averages and its property at a cap rate of 5%. His TP of 78 cents implies a FY2023 P/E multiple of 21.2x, similar to its five-year mean P/E.

As at 10.27am, shares in Singpost were trading at 64 cents with a dividend yield of 2.81%.

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