Brokers’ take: CGS-CIMB downgrades SingPost to ‘reduce’ amid tough operating environment 

CGS-CIMB on Monday (Aug 22) downgraded its call on Singapore Post (SingPost) : S08 0%from “add” to “reduce”, while lowering its target price on the stock to S$0.55 from S$0.80 to reflect a lower FY2023 price-to-earnings multiple of 15.8 times compared to 18.8 times previously.

The new multiple is 1 standard deviation below the stock’s 5-year historical average, as CGS-CIMB factors in near-term headwinds for SingPost, such as continued challenges for its domestic post and parcel (DPP) segment and a slower-than-expected recovery for its international post and parcel (IPP) segment. 

The research house’s downgrade comes as its analyst Ong Khang Chuen thinks SingPost’s net profit could remain dragged in the near-term until the group’s IPP segment shows stronger signs of recovery.

Recounting how SingPost’s Q1 FY2023 Ebit (earnings before interest and tax) missed both the research house and Bloomberg expectations, the analyst notes that this was because IPP recovery was “hampered by transient issues”.

In his view, the group will require more time to diversify from its DPP segment, which “faces significant headwinds”.

While Ong believes IPP volumes should recover in the upcoming quarters, the pace could be gradual in the near-term, in his view.

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“We believe that IPP volumes should recover in the upcoming quarters given incremental air capacity improvement through Changi Airport and moderation of air conveyance costs towards the end of Q1 FY2023. However, the pace of recovery could be gradual in the near- term given continued strict Covid-related controls in China and weaker cross-border volumes year-to-date due to changes in the European Union’s VAT rules,” he explained.

Potential downside risks would include tougher competition in the last-mile delivery space, said Ong, as this would cause further DPP weakness. 

“Upside risks include earnings-accretive M&A (mergers and acquisitions) and easing Covid-19 restrictions in China, or sharp decline in conveyance costs aiding stronger IPP volumes recovery,” he added.

As at 11:38 am on Monday, shares of SingPost were trading at S$0.605, down 2.4 per cent or S$0.015.