Brokers' take: Aviation a drag on SingPost's recovery, say analysts

ANALYSTS from CGS-CIMB and DBS Group Research said in separate reports that Singapore Post's (SingPost) recovery from the coronavirus pandemic will depend on how quickly the aviation industry can bounce back.

This comes as the reduced air freight capacity amid pandemic-related disruptions has led to significantly higher conveyance costs for the postal service provider.

In a report on Friday, CGS-CIMB downgraded SingPost to "hold" from "add", and lowered its target price to S$0.70 from S$0.77, on limited earnings visibility and catalysts.

The "hold" call is underpinned by the company's S$195 million net cash, CGS-CIMB's forecast 3-4 per cent dividend yield for fiscal 2021-2023, as well as medium-term growth initiatives, the brokerage said.

CGS-CIMB analyst Ngoh Yi Sin cut her forecast for FY2021-2023 earnings per share (EPS) by 4.1-12.1 per cent.

Even though the surge in conveyance costs is now on an easing trend, an improvement in SingPost's EPS will hinge on the aviation industry's recovery, which has limited visibility in the near term, she said.

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The firm's underlying net profit for the six months ended Sept 30, 2020, fell 40 per cent to S$31.5 million - missing forecasts by both CGS-CIMB and DBS Group Research.

This was due to structural domestic mail weakness and international margin pressure, according to Ms Ngoh.

DBS, meanwhile, noted that the main culprit was a spike in volume-related costs - which grew 27 per cent on the year compared to group revenue increasing only 10 per cent - given the fewer number of passenger flights operating at Changi Airport.

SingPost uses passenger flights to ship international mail and was forced to use sub-optimal routes to deliver those packages, which led to costs ballooning to about two to three times of normal levels, said DBS in a note on Monday.

DBS analysts Sachin Mittal and Lim Rui Wen said profit for SingPost has bottomed out in the first half of fiscal 2021, with slow recovery ahead.

They expect the company to take at least 12-18 months to fully recover from the Covid-19 pandemic, as passenger flights at Changi Airport used for delivering international mail may not recover to their full strength till then.

The DBS research team on Monday maintained its "fully valued" call on the stock, but lowered the target price to S$0.60 from S$0.64 previously.

According to CGS-CIMB, key positives for the company will lie in the increased e-commerce adoption and its logistics turnaround. In particular, the logistics segment will be further strengthened by its recent A$85 million (S$83.3 million) acquisition of Freight Management Holdings in Australia, said Ms Ngoh.

Also, the company's higher proportion of e-commerce revenue in the half year ended Sept 30 is a testament to SingPost as a long-term e-commerce proxy, she added. E-commerce revenue made up 32 per cent of total domestic post and parcel revenue in the April-September period this year, up from 18 per cent in the year-ago period.

DBS noted that both Quantium Solutions and SP eCommerce continued to benefit from the re-engineering of processes to improve customer experience, efficiency and scalability. This resulted in more customers taking up their suite of e-commerce logistics solutions, which include warehousing and fulfilment, as well as front-end solutions.

However, DBS pointed out the strong competitive landscape. "With e-commerce penetration at only 4 per cent of retail sales in Asean, versus 24 per cent in China, venture capitalists are funding many logistics startups in the hope of attaining scale in the future, making competition irrational," Mr Mittal and Ms Lim wrote.

There has also been an accelerated decline in high-margin domestic mail revenue driven by e-substitution.

And international mail growth may only slowly recover in the second half of fiscal 2021 as economic activities resume, but will be held back by intense competition and expansion of the tax net on cross-border e-commerce deliveries, said DBS.

SingPost plans to grow its e-commerce business amid a surge in demand - but moving parcels is a competitive business and not a particularly lucrative one.

"While earnings for the domestic e-commerce (segment) are growing and accelerating, margins are not like-for-like against letter mail," said SingPost's chief executive Paul Coutts last week.

SingPost is nevertheless continuing to invest in e-commerce capabilities. Mr Coutts said the group is now looking to build a strong business-to-business-to-consumer network in order to "exploit growing demand for integrated supply chains".

Shares of mainboard-listed SingPost gained 0.4 Singapore cent or 0.8 per cent to trade at 67.5 cents as at 1.27pm on Monday.