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Singapore Post: Challenging Times (OTCMKTS:SPSTF)

Elevator Pitch

I downgrade my rating on Singapore-listed national postal service provider Singapore Post Limited (OTCPK:SPSTF) (OTCPK:SPSTY) [SPOST:SP] from Neutral to Bearish.

Singapore Post’s core Post & Parcel business segment continued to face both cyclical and structural headwinds. At the same time, negative operating leverage, higher conveyancing costs, and other expenses relating to measures to contain the coronavirus pandemic are expected to be a drag on Singapore Post’s profit margins. Furthermore, Singapore Post’s P/E valuation and dividend yield remain unattractive.

This is an update of my prior article on Singapore Post published on February 13, 2020. Singapore Post’s share price has declined by -13% from S$0.87 as of February 12, 2020, to S$0.76 as of May 21, 2020, since my last update. Singapore Post trades at 19.7 times consensus forward next twelve months’ P/E, which is on par with its historical five-year and 10-year mean consensus forward next twelve months’ P/E multiples of 20.8 times and 18.5 times, respectively. The stock also offers consensus forward FY2021 (YE March) and FY2022 dividend yields of 3.6% and 4.3%, respectively.

Readers have the option of trading in Singapore Post shares listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the tickers SPSTF and SPSTY, or on the Singapore Stock Exchange with the ticker SPOST:SP. For Singapore Post shares listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.

For Singapore Post shares listed in Singapore, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Singapore Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $2.5 million, and market capitalization is above $1.2 billion, which is comparable to the majority of stocks traded on the US stock exchanges. Institutional investors who own Singapore Post shares listed in Singapore include The Vanguard Group, Norges Bank Investment Management, BlackRock Advisors and Aberdeen Standard Investments, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic markets.

Cyclical And Structural Headwinds For Core Post & Parcel Business

Singapore Post’s core Post & Parcel business segment continued to underperform in 4QFY2020 (YE March), with the coronavirus pandemic adding to its woes.

The Post & Parcel business saw revenue decline by -5.7% YoY from S$188.8 million in 4QFY2019 to S$178.2 million in 4QFY2020, as weakness in the domestic sub-segment was partially offset by a relatively steady performance for the international sub-segment. Revenue for the domestic sub-segment of the Post & Parcel business fell by -15.4% YoY from S$68.4 million in 4QFY2019 to S$57.9 million in 4QFY2020, while the top line for the international sub-segment declined marginally by -0.1% YoY from S$120.4 million to S$120.2 million over the same period.

As a result of negative operating leverage and an unfavorable change in sales mix (international mail has lower margins compared with domestic mail), the Post & Parcel business’s segment operating profit dropped by -47.7% YoY to S$18.0 million for 4QFY2020, compared with a -5.7% YoY decrease in segment revenue.

The domestic sub-segment of the Post & Parcel business remains weak due to both cyclical and structural reasons.

With business activities and events coming to a standstill in Singapore Post’s home market Singapore as a result of the coronavirus pandemic, advertising mail volumes have decreased substantially. Singapore has been in a state of partial lockdown (referred to as “circuit breaker measures”) starting on April 7, 2020, which will last till June 1, 2020. With the country adopting a “phased approach to resuming activities” after June 2, 2020, advertising mail volumes are unlikely to recover to normalized levels anytime soon.

Apart from the cyclical decline in advertising mail volumes, the decrease in domestic letter mail volumes is also a structural issue. At the company’s 4QFY2020 earnings call on May 8, 2020, Singapore Post noted that the drop in domestic letter mail volumes “used to be more in the mid-single digit range and so it has actually got to double digit now.” On the positive side of things, the company added at the recent earnings call that “we haven’t seen any further changes in a sense through the Covid crisis”, implying that there has yet to be an accelerated decline in domestic letter mail volumes resulting from companies switching from physical to digital forms of communication during the coronavirus pandemic period.

Also, domestic e-commerce volumes “continue to grow” in 4QFY2020 and was referred to as “a bright spark in our story through this Covid-19 crisis” as per management comments at Singapore Post’s 4QFY2020 earnings call on May 8, 2020. This is positive for the domestic sub-segment of the Post & Parcel business, but revenues relating to domestic e-commerce are still insignificant relative to that from domestic letter mail.

On the other hand, the international sub-segment of the Post & Parcel business is also facing headwinds, primarily relating to supply chain disruptions and higher conveyancing costs as a result of the coronavirus pandemic. Revenue for the international sub-segment declined marginally by -0.1% YoY in 4QFY2020, compared with a +6.1% YoY growth in 3QFY2020.

Singapore Post highlighted at its 4QFY2020 earnings call on May 8, 2020 that “neither can your mail nor eCommerce volumes get to your destinations” with the closing of borders and the lack of flights. The company also noted that conveyancing costs are likely to remain high, as “there’s so little air capacity for so many things to move through the entire system.”

With cross-border e-commerce being a key contributor for the international sub-segment of the Post & Parcel business, the near-term outlook for the sub-segment is bleak, as consumers defer their purchases due to either uncertainty over having their products delivered or belt-tightening measures in anticipation of weak economic conditions.

A Mixed Bag For The Logistics Business

Revenue for Singapore Post’s Logistics business declined by -1.9% YoY from S$135.4 million in 4QFY2019 to S$132.9 million for 4QFY2020. A +3.8% YoY growth in top line for the e-commerce logistics sub-segment was more than offset by a -7.6% decline in revenue for the freight forwarding sub-segment.

For the e-commerce logistics sub-segment, Quantium Solutions, a provider of logistics and fulfillment services in the Asia-Pacific region, was the outperformer, as its revenue grew by a strong +28.5% YoY in the most recent quarter, primarily driven by new clients in North Asia and Southeast Asia. At the company’s 4QFY2020 earnings call on May 8, 2020, Singapore Post attributed the strong performance of Quantium Solutions to the fact that the “re-engineering and repositioning of Quantium is showing some rewards”, and the company noted that “we’ve got a lot more to do in that area.”

On the flip side, the freight forwarding sub-segment for the Logistics business, led by Famous Holdings, a freight consolidator and freight-forwarder with a regional presence in seven countries, did not perform as well. Famous Holdings’ freight forward volumes were already negatively impacted by US-China trade tensions in 2018 and 2019, and the coronavirus pandemic is another key headwind for the business.

Looking ahead, the freight forwarding sub-segment could potentially see an even larger revenue decline in 1QFY2021 (the second quarter of calendar year 2020). This is largely because ocean freight is a significant component of Singapore Post’s freight forwarding business, and it takes around a month for goods to be transported by sea. In other words, Famous Holdings’ 1Q2020 financial performance might not have reflected the decline in freight forwarding volumes since March 2020 when the coronavirus pandemic started to escalate.

Pressure On Profitability

Singapore Post’s profitability is also under pressure, as negative operating leverage, higher conveyancing costs and other expenses relating to measures to contain the coronavirus pandemic are expected to depress the company’s profit margins.

Firstly, Singapore Post’s Post & Parcel and Logistics businesses both have a high-fixed cost structure, which implies that a small decrease in revenue will result in a much larger decline in profits.

Secondly, Singapore Post is unlikely to have much leeway to pass on higher conveyancing costs to its customers. Singapore Post noted at its 4QFY2020 earnings call on May 8, 2020, that eCommerce deliveries “is a market that is very competitive so, in a sense, there’s only this much we can do” and also stressed that “if we do that (passing on costs to clients) all the time then we wouldn’t be growing all that revenues so quickly at the same time.”

Thirdly, Singapore Post is also incurring additional costs to house its Malaysian staff working in Singapore. Some of the company’s Malaysian workers used to travel to and fro between Malaysia and its neighbor Singapore on a daily basis, but that was not possible after both countries implemented border restrictions to contain the coronavirus pandemic.

The cost pressures for Singapore Post are partly mitigated by the introduction of the Job Support Scheme in Singapore, which sees the government co-funding part of local workers’ wages for nine months. Singapore Post recognized a S$5.2 million reduction in labor costs in 4QFY2020 relating to the Job Support Scheme.

Valuation And Dividends

Singapore Post trades at 19.4 times trailing twelve months’ P/E and 19.7 times consensus forward next twelve months’ P/E based on its share price of S$0.76 as of May 21, 2020. As a comparison, the stock’s historical five-year and 10-year mean consensus forward next twelve months’ P/E multiples were 20.8 times and 18.5 times, respectively.

Singapore Post offers consensus forward FY2021 (YE March) and FY2022 dividend yields of 3.6% and 4.3%, respectively. The company’s dividend policy is to pay out dividends every year based on “a payout ratio ranging from 60% to 80% of underlying net profit.” Singapore Post recommended a final dividend of S$0.012 per share for 4QFY2020 which brought full-year FY2020 dividends per share to S$0.027. This represents a -23% YoY decrease in absolute terms, and a dividend payout ratio of 60%.

At the company’s 4QFY2020 earnings call on May 8, 2020, Singapore Post acknowledged that its FY2020 dividend “is at the lower end of the dividend policy range of 60% – 80% of our UNP (underlying net profit)”, but emphasized that this was “a very solid and a robust display of our ability to pay dividends in spite of a very challenging circumstance.”

Market consensus expects Singapore Post’s dividends per share to increase slightly from S$0.027 in FY2020 to S$0.028 in FY2021 based on a 70% dividend payout ratio.

Risk Factors

The key risk factors for Singapore Post include a faster-than-expected rate of decline in letter mail volumes, weaker-than-expected profitability, and lower-than-expected dividends going forward.

Note that readers who choose to trade in Singapore Post shares listed as ADRs on the OTCBB (rather than shares listed in Singapore) could potentially suffer from lower liquidity and wider bid/ask spreads.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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