May 7, 2021

FY21: Missed Expectations; Awaiting Better Visibility.

SPOST’s core net profit for 2HFY21 was down 40% yoy as international post and parcel margins continue to be disrupted by air freight capacity cuts. Operating margins have been hard hit, falling to 5.6% (-5.3ppt yoy) in spite of the positive outlook from ecommerce demand propelling the domestic post and parcel segment as well as the logistics segment. The visibility on air freight capacity is still uncertain, which could continue to weigh on margins. Maintain HOLD with a target price of S$0.73.

RESULTS

• 2HFY21 core net profit of S$28.6m (-40% yoy). Singapore Post’s (SPOST) FY21 core net profit was S$60.1m, below expectations. Final dividend dipped to 0.6 S cents (FY20: 1.2 S cents). Full-year dividend of 1.1 S cents implies a 40% payout ratio. Sequentially, the group’s 4QFY21 operating profit was about S$14m, still down substantially yoy, as volume-related expenses continued to impact margins with higher international conveyance and commercial freight costs.

• Postal revenue: Keeping a watch on margins. SPOST’s postal revenue fell 10% yoy in 2HFY21. The group continues to manage its international postal segment carefully given the higher conveyance costs. Margins were still a concern as operating margins dipped to 5.9% for the segment (-7.3ppt yoy) though an inflexion point could occur if volume-related expenses can normalise to pre-COVID-19 levels. Domestic postal revenue saw a 7% growth yoy in 2HFY21 as eCommerce growth continued to pick up, replacing revenue lost from a drop in letter volumes. The group continues to look forward to e-commerce deliveries through its smart letterbox which began trials in Dec 20.

• Rationalising international postal costs. SPOST highlighted that border closures and higher international conveyance costs out of Changi Airport continue to have an impact on the performance of international postal segment. Management highlighted that volumes and demand for international postal services remains strong though cost pressures have necessitated a rationalisation of contracts and volumes undertaken for now. A normalisation of costs will likely see a return in volume and revenue growth for the segment.

• Logistics: Still on a high from eCommerce. Increased eCommerce activities continue to support the logistics segment. In particular, CouriersPlease revenue rose 48% on strong volume growth in Australia while Quantium Solutions and SP eCommerce benefitted from process re-engineering initiatives, leading to more customers for eCommerce logistics solutions, such as warehousing, fulfilment & front-end solutions.

STOCK IMPACT

• eCommerce as the future. The ratio of eCommerce to letter delivery is currently about 1:10, and is expected to be reduced with a growing proportion of eCommerce postal delivery. The initial infrastructure is starting to take shape, with SPOST’s smart letterbox concept, though rollout could still take some time. Further enhancements could take the form of changes to fleet (shifting to 3/4 wheeler vehicles from scooters) to enable larger eCommerce postal package deliveries.

EARNINGS REVISION/RISK

• Cut earnings forecasts by 2-11% for 2022-23. We incorporate higher volume-related expenses on the back of elevated conveyance costs from flight disruptions.

VALUATION/RECOMMENDATION

• Maintain HOLD with a lower SOTP-based target price of S$0.73. We value: a) the mail business at 10x FY22F PE; b) logistics business at 8.0x FY22F EV/EBITDA, both in line with peers’ average; and c) property at a cap rate of 5%.

• The increase in local COVID-19 cases in recent weeks could throw a spanner into the works for the resumption of air travel. This would delay the return in air freight capacity and could keep expenses elevated for an extended period of time.

SHARE PRICE CATALYST

• Pick-up in air travel volume

• Lower-than-expected decline in domestic postal services.

• M&As.

HOLD by UOB Kay Hian Research. Share price closed at $0.735.