Is Singapore Post Limited a Good Investment Now?

While Singapore is a highly wired country with much of the mailing correspondence shifting into electronic form, physical mail still occupies a prominent spot when it comes to official or legal notifications sent by government agencies or corporations.

Singapore Post Limited (SingPost) is the only player in this field as it holds Singapore’s only public postal licensee. Mailman donning the blue uniform delivering mails and parcels within the neighborhood is still a common sight.

We take a closer look at Singpost’s operations and earnings performance in this article.

Business Segments

SingPost has re-classified its business units into four segments starting from 1 Apr 2018.

Post and Parcel – is the bread and butter of Singpost’s operations that includes domestic mail, international mail, parcel delivery, products and services transactions at post offices.

Logistics – comprises the logistic operations undertaken by Singpost subsidiaries and associates such as Quantium Solutions, Couriers Please and Famous Holdings.

eCommerce – consumer-facing operation in the Asia Pacific and United States eCommerce units: TradeGlobal and Jagged Peak.

Property – includes the provision of commercial property rental and a self-storage business.

In Financial Year 2017/2018, Singpost reported its earnings according to the old operating segments. Postal revenue share was 41.7% of total revenue which amount to $1.46 billion, followed by Logistics at 40.2% and eCommerce with 18.1% share.

Source: Singpost Annual Report 2017/18

5 Year Financial Highlights

Source: Singpost Annual Report 2017/18

 

As seen from the diagram above, Singpost revenue has been growing at a healthy rate in the past 5 years from $821.1 million to $1,464.1 million. However, its net profit has not been able to expand on the same trajectory. Highest net profit achieved was in year 2015/2016 with $248.9 million, which plunged to $33.4 million in year 2016/2017. Overall, net profit has been on a downtrend.

Operating cash flow has also gradually slipped to $198.2 million from $241.8 million five years ago.

Latest Quarter Results

In quarter one FY18/19, Singpost reported a revenue of $372.6 million, a 3.3% increase year-on-year (yoy). Its Profit before Income Tax slumped 22.8% yoy to $28.5 million. Notably, Share of Loss of Associate and Joint Venture worsened by 24% to a loss of $3.47 million.

Let’s take a closer look at each segment’s performance.

Post and Parcel

Source: Singpost Q1 FY2018/19 Earnings Presentation

Revenue from this segment increased 5.7% yoy to $186 million, supported by revenue growth in international mail and Singpost parcels. However, Operating Profit shrank 3.8% to $41.8 million. Correspondingly, Operating Profit margin compressed to 22.5%

Logistics

Source: Singpost Q1 FY2018/19 Earnings Presentation

Revenue contracted 2.2% to $120.4 million. Only Couriers Please, a subsidiary specialised in Australia last-mile delivery had an increase in revenue. This segment managed to eke out a $0.1 million profit for this quarter.

eCommerce

Source: Singpost Q1 FY2018/19 Earnings Presentation

eCommerce segment results were lackluster too. Revenue shrank 4.3% to $55.2 million, with Operating Profit plunging 94% to a loss of $9.3 million.

Management explained that this is due to US businesses which experienced pricing pressure, change in sales mix to lower margin freight services and an increase in technical labour cost.

Overall, Singpost’s results this quarter does not seem to be satisfactory, going by its stagnant revenue and smaller Net Profit before Income Tax.

Strengths and Opportunities

One of Singpost’s strengths lies in its stronghold on Singapore postal and parcel delivery market as the number 1 last mile delivery provider. Besides being the sole public postal licensee with established market dominance and 3 million mail delivery per day, it also has the widest smart locker network and self-service automated kiosks which includes 11,500 POPStation lockers and 300 SAM machines. While this segment does not have exciting prospect due to limited growth of a small market, it does provide a stable stream of operations revenue to the group.

An opportunity for Singpost is the potential growth in delivery services such as food, grocery, and medicine. Leveraging its established delivery network, logistic infrastructure and order fulfillment system, Singpost can easily scale up operations without incurring too much start-up capital. According to a research report by DBS titled ‘Opportunities Abound!’, hospitals and polyclinics had started offering medicine delivery and pick-up services which have gained traction especially for patients with long-term prescriptions.

Weaknesses and Threats

One key weakness is that, despite the implementation of the turnaround plan and various strategies, its eCommerce segment is still registering losses. According to the Q1 FY18/19 Results Analysts Briefing transcript, management attributed this to the subpar performance in the US where there was a lower than expected volume in June and a product mix that was more skewed towards freight business with lower margin. Integration costs continued to add pressure to margin too.

Another risk is the potential loss of key customers due to a competitive industry. Singpost subsidiary TradeGlobal lost two major customers in the US last year, which resulted in a loss of 40% of revenue that has definitely impacted its earnings. There is no guarantee that such a scenario would not play out in the future again. SingPost would have to sharpen its technology and solutions, in order to deliver more superior services to its customers to bolster a long-term, sustainable business.

Valuation

With an Earnings per Share of 4.92 cents in 2018 and the current share price of $1.14, Singpost is being valued at PE ratio of 23.1.

Its dividend per share is 3.5 cents, giving it a yield of 3%.

Conclusion

Judging from its latest quarterly results, it seems that Singpost’s Logistics and eCommerce segments that are highly touted as the next growth engine are not out of the woods yet. Much of its future prospect would hinge on the successful turnaround of the two segments.

With that still being unclear at the moment, Singpost’s valuation of PE 23.1 seems rather rich. I would be cautious on its share and probably would need a much lower entry price for a more enticing risk-reward ratio.

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