SingPost’s accelerated FMH acquisition eases put-option uncertainty; favourable tailwinds ahead

China’s relaxation of its Covid-19 policies provides favourable headwinds for its IPP segment which has faced depressed volumes.

UOB Kay Hian analyst Llelleythan Tan has maintained his “hold” call on Singapore Post (SingPost) with a higher target price of 58 cents from 52 cents previously following the company’s announcement of acquiring additional stake in Freight Management Holdings (FMH).

On Jan 11, SingPost announced that it is acquiring an additional 37% stake in 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, accelerating its plan for eventual full ownership of FMH.

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 the first quarter of 2024 onwards, Tan notes.

S&P Global Ratings analyst Pauline Tang points out that SingPost has ample cash to proceed with the accelerated acquisition, taking out most of the put options held by FMH minority investors to sell their remaining stake to SingPost.

The firm views the transaction as “broadly credit neutral”, as its base case and adjusted debt assumptions already accounted for cash needs that might stem from the trigger of the put. “The accelerated transaction replaces a sizable quantum of adjusted debt with on-balance sheet debt and utilises discretionary cash reserves.

“We now estimate SingPost's debt-to-ebitda ratio will be 3.0x to 3.5x in fiscal 2023 (ending March 31, 2023) and 2.3x to 2.8x in fiscal 2024 and fiscal 2025. Our base case adds $75 million to $100 million to SingPost's adjusted debt; the amount would be sufficient to settle put options on the remaining 12% stake in FMH still held by minority investors,” she adds.

In Tang’s view, SingPost's decision to accelerate the acquisition removes some uncertainty over the quantum of cash payments that could be triggered by the put option. The payments would have otherwise depended upon FMH's ebitda growth trajectory and timing of when the put options would be exercised.

In order to combat elevated operating costs and the recent goods and services tax (GST) increase, SingPost has increased delivery postage for most of its services from the domestic post and parcel (DPP) segment. From the start of the year, postage rates for its products and services such as basic mail letterbox delivery to Speedpost delivery have increased by 1% to 3%, set to increase again by another 1% to 3% from Jan 1, 2024 onwards, Tan highlights.

Facing inflationary pressures, the higher postage rates are expected to support compressing margins that the DPP segment has been facing. However, in Tan’s view, the higher postage rate increases are insufficient to cover rising costs, given that domestic headline inflation is estimated at 6.5%-7.0% and 5.5%-6.5% for 2022 and 2023 respectively.

Meanwhile, China’s relaxation of its Covid-19 policies provides favourable headwinds for its International Post and Parcel (IPP) segment, which has faced depressed volumes, says Tan. After three years of self-isolation, China has lifted restrictions on its international borders whereby inbound travellers are now able to enter the country quarantine-free.

Without sporadic Covid-19 lockdowns in key manufacturing hubs, outgoing IPP postage volumes are expected to recover as China is SingPost’s largest IPP contributor, says Tan. “However, there is currently limited international flight capacity in and out of China which we reckon may take two-three quarters before flight capacity returns to pre-Covid-19 levels as travel demand recovers,” he adds.

UOB increases its FY2024-FY2025 revenue and net profit forecasts, accounting for the new increased stake in FMH. They now forecast FY2024-FY2025 revenue at $2.20 billion (from $1.99 billion previously) and $2.29 billion (from $2.06 previously) respectively. The PATMI forecasts are also increased to $52.7 million and $76.4 million, from $25.2 million and $64.8 million respectively. The analyst leaves its FY2023 forecasts unchanged.

As at 11.30am, shares in SingPost are trading 0.5 cents lower or 0.94% down at 52.5 cents.

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