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Mon, Nov 09, 2020 – 1:34 PM
ANALYSTS from CGS-CIMB and DBS Group Research said in separate reports that the Singapore Post’s (SingPost) recovery from the coronavirus pandemic will depend on how quickly the aviation industry can recover.
This is because the reduction in air transport capacity amid pandemic-related disruptions has led to significantly higher transportation costs for the postal service provider.
In a report on Friday, CGS-CIMB downgraded SingPost’s rating to “hold” from “add”, and lowered its price target to S $ 0.77 from S $ 0.77, due to limited earnings visibility and catalysts.
The “hold” call is supported by the company’s S $ 195 million net cash, the 3-4% dividend yield predicted by CGS-CIMB for fiscal year 2021-2023, as well as growth initiatives. medium term, the brokerage said.
CGS-CIMB analyst Ngoh Yi Sin lowered her earnings per share (EPS) forecast for fiscal 2021-2023 by 4.1-12.1 percent.
Although the increase in transport costs now has a tendency to relax, an improvement in SingPost’s EPS will depend on the recovery of the aviation industry, which has limited visibility in the short term, he said.
The company’s underlying net income for the six months ended September 30, 2020 fell 40 percent to S $ 31.5 million, which fell short of the forecasts by CGS-CIMB and DBS Group Research.
This was due to the structural weakness of the domestic post and pressure from international margins, according to Ms Ngoh.
Meanwhile, DBS noted that the main culprit was an increase in volume-related costs, which grew 27 percent on the year compared to the group’s revenue that increased only 10 percent, given the lower number of flights. of passengers operating at Changi Airport.
SingPost uses passenger flights to send international mail and was forced to use suboptimal routes to deliver those packages, leading to costs skyrocketing to about two to three times normal levels, DBS said in a note Monday.
DBS analysts Sachin Mittal and Lim Rui Wen said SingPost’s earnings bottomed out in the first half of fiscal 2021, with a slow recovery ahead.
They expect it to take at least 12-18 months for the company to fully recover from the Covid-19 pandemic, as passenger flights at Changi Airport used to deliver international mail may not fully recover until then.
The DBS research team maintained its “fully priced” option on the stock on Monday, but lowered the price target to S $ 0.60 from S $ 0.64 previously.
According to CGS-CIMB, the key positives for the company will lie in the increased adoption of e-commerce and its logistics shift. In particular, the logistics segment will be bolstered by the recent acquisition of Freight Management Holdings in Australia for AU $ 85 million (S $ 83.3 million), Ms Ngoh said.
Additionally, the company’s higher share of e-commerce revenue in the semester ending September 30 is a testament to SingPost as a long-term e-commerce proxy, he added. E-commerce revenue accounted for 32 percent of total domestic mail and parcel revenue in the April-September period this year, up from 18 percent in the prior year period.
DBS noted that both Quantium Solutions and SP eCommerce continued to benefit from process reengineering to improve customer experience, efficiency and scalability. This resulted in more customers taking up their suite of e-commerce logistics solutions, including warehousing and fulfillment, as well as front-end solutions.
However, DBS noted the strong competitive landscape. “With e-commerce penetration of just 4 percent of retail sales in Asean, up from 24 percent in China, venture capitalists are funding many logistics startups in hopes of reaching scale in the future, which which makes competition irrational, “said Mittal and Ms. Lim wrote.
There has also been a rapid decline in high margin domestic mail revenue driven by electronic substitution.
And international mail growth can only slowly recover in the second half of fiscal 2021 as economic activities resume, but will be held back by intense competition and the expansion of the tax network in cross-border e-commerce deliveries, DBS said.
SingPost plans to grow its e-commerce business amid a surge in demand, but moving packages is a competitive business and not particularly lucrative.
“While profits for the domestic e-commerce (segment) are growing and accelerating, the margins are not the same when compared to postal mail,” SingPost CEO Paul Coutts said last week.
However, SingPost continues to invest in e-commerce capabilities. Coutts said the group is now looking to build a strong business-to-business-to-consumer network to “exploit the growing demand for integrated supply chains.”
Shares of SingPost, which is traded on the motherboard, rose 0.4 Singapore cents or 0.8 percent to trade at 67.5 cents as of 1:27 p.m. Monday.
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