Brokers’ take: UOBKH raises SingPost target to S$0.58 on Australia expansion

UOB Kay Hian (UOBKH) increased its target price for Singapore Post (SingPost) from S$0.52 to S$0.58, while maintaining its “hold” call.

This came as the research house raised its revenue and net profit forecasts for SingPost from FY2024 to FY2025 to account for the group’s increased stake in its Australian subsidiary, Freight Management Holdings (FMH). 

The research house now expects SingPost to book revenue of about S$2.2 billion for FY2024 and S$2.3 billion for FY2025, up from previous estimates of some S$2 billion in revenue for each year.

In a report on Tuesday (Jan 17), UOBKH analyst Llelleythan Tan said he expects SingPost’s increased stake in FMH to boost the group’s profitability from the first quarter of 2024 onwards, given the Australian subsidiary’s robust operating profit growth. 

His positive outlook on the group was further supported by China’s relaxation of Covid-19 policies, which Tan said will provide “favourable tailwinds” for SingPost’s international post and parcel (IPP) segment.

“Without sporadic Covid-19 lockdowns in key manufacturing hubs, outgoing IPP postage volumes are expected to recover, given China being SingPost’s largest IPP contributor,” Tan said.

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However, he noted that flight capacity may take two to three quarters before it returns to pre-Covid levels.

In the short term, Tan expects that more narrow-bodied passenger aircrafts, instead of cargo planes, will be transiting at Changi Airport to cater to overwhelming travel demand. This would result in lesser belly hold cargo space that SingPost uses for its IPP postage.

To combat elevated operating costs and the recent good and services tax increase, SingPost increased delivery postage rates by 1-3 per cent for most of its services from the domestic post and parcel (DPP) segment.

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But Tan said this is insufficient to cover rising costs and normalising DPP volumes, as domestic headline inflation is expected to remain high in the near term. 

In his view, additional postage rate hikes are needed to help support compressed margins and sliding DPP volumes.

UOBKH currently values SingPost at S$0.70, with the logistics and property segments valued at about S$1.6 billion.

Given that SingPost’s market cap is at around S$1.2 billion, Tan said the postal segment is undervalued by the market. Any potential reversal in postal earnings could lead to valuation upside, he added. 

Shares of SingPost were trading flat at S$0.53 as at 9.15 am on Tuesday.