Yahoo Finance UOB Kay Hian ups SingPost’s TP to 51.5 cents after postage rate hike
“With the postal rate hike, we now reckon that the domestic parcel and post (DPP) segment has reached a bottom."
UOB Kay Hian analyst Llelleythan Tan has kept his “hold” call on Singapore Post (SingPost) S08 after the group announced that it would be increasing its postal rates by 64.5% from October onwards.
SingPost, on Sept 19, announced that it will increase its rates for standard regular mail to 51 cents, 20 cents higher than the current rate of 31 cents.
“Despite a near-term solution to SingPost’s mailing segment woes, we are still uncertain over the success of the postal rate hike given the sharp increase in mailing costs, coupled with the lack of clarity over SingPost’s group strategic review,” says Tan in his Sept 20 report.
The hike may also prove to be a “double-edged sword” for SingPost with the “aggressive” 64.5% increase likely to hasten a decline in postal volumes.
“It was reported that Singapore businesses account for more than 80% of mail users, with the average user sending less than one letter a month. Given the short time frame (two to three weeks) to adjust to the rate hike, we think that businesses would be quick to jump to greener and online alternatives,” says Tan.
“We expect to see a sharper decrease in mailing volumes for 2HFY2024, partially offsetting additional revenue from the rate hike,” he adds.
Higher target price
In light of the rate increase, Tan has, however, increased his target price to 51.5 cents from 44 cents previously. The new target price is based on the same FY2024 P/E multiple of 21.3x, which is SingPost’s average long-term mean P/E.
“The postal rate hike is line with our earlier expectations as we opined that the 1% - 3% postal rate increase in January 2023 was insufficient to cover elevated operating costs driven by inflationary pressures,” Tan writes.
“With the postal rate hike, we now reckon that the domestic parcel and post (DPP) segment has reached a bottom. Based on our FY2024 estimates, we now expect the DPP segment to [achieve] breakeven for FY2024,” he adds.
Furthermore, the added revenue from the postal rate hike is likely to translate into more earnings for SingPost given that there is no incremental increase in operating costs.
“Assuming a 10% y-o-y secular decline in domestic postal volumes for FY2024 and no sharp increase in operating costs, we now expect the DPP segment to recover close to breakeven for FY2024, implying $22 million - $25 million operating profit in 2HFY2024,” says Tan.
For the FY2024 to FY2026, Tan has increased his patmi estimates to $54.5 million (from $46.5 million), $85.1 million (from $73.3 million) and $104.9 million (from $94.5 million) from the upcoming postal rate hikes while lowering his overall margin assumptions.
Is a nationalisation of SingPost’s letter and mail business on the cards?
Should the latest postal rate hike prove insufficient for SingPost, the analyst is anticipating more rate adjustments to stem the decline in the profitability of its DPP segment.
“Postage rates are still expected to increase by 1 - 2 cents in January 2024 from an earlier postal adjustment announced in December 2022. We also expect SingPost to consolidate its postal branches and multiple sorting centres, achieving greater economies of scale and lower overhead costs. Management noted that there would be no relaxation of postal service standards which would have reduced operating costs,” Tan notes.
He adds that a divestment of SingPost’s letter and mail postal business to the Singaporean government is still unlikely in the near to medium term based on other global national postal companies who have adjusted their postal rates first.
“SingPost has not adjusted rates since 2014 and is only now catching up,” the analyst notes.
Shares in SingPost closed at 51.5 cents on Sept 22.
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