SingPost on expansion track in fast-growing Australia market with latest acquisition

SINGAPORE Post (SingPost) expects to eventually acquire the remaining 12 per cent of Freight Management Holdings (FMH), giving it full ownership of the crown jewel in its Australia venture. Expansion in Australia is helping to make up for the lack of growth opportunities in Singapore, as the postal services provider transforms into an international logistics player.

SingPost recently announced it will raise its stake in FMH to 88 per cent for A$175.4 million (S$163.7 million). The deal is expected to be completed in early 2023, funded by cash reserves and bank lending.

SingPost first acquired a 28 per cent interest in the Australian logistics player in 2020, then increased its shareholding to 51 per cent in 2021.

Some 60 per cent of FMH’s business is fourth-party logistics, using its proprietary technology platform to match corporate customers’ freight profiles with the optimal logistics providers. According to FMH’s website, it operates the largest fourth-party logistics provider in Australia. It has over 150 carriers and more than 500 customers across a wide range of sectors.

Fourth-party logistics, also known as 4PL, refers to a business operating model in which supply chain management and logistics are completely outsourced to a single partner.

The remaining 40 per cent business of FMH deals in third-party logistics services.

SingPost group chief financial officer Vincent Yik did not want to commit to a timeframe on full ownership of FMH, but he told The Business Times that the purchase “will be a matter of time”.

The put options to sell the 12 per cent, held by FMH minority shareholders, as well as the call options held by SingPost to increase its stake, do not have an expiry date. Both options are independent, so either party can exercise them.

Should the put option be exercised by the minority shareholders, SingPost is committed to pay an amount tied to the performance of FMH. The better FMH performs, the more SingPost would have to pay for those shares it does not already own.

SingPost posted a S$9.9 million net loss in its first-half of FY2023 to September, despite its revenue having increased 31.1 per cent year on year to S$958.9 million. The red ink was due to a fair value charge of S$21 million arising from the higher put option redemption liability on FMH.

Explaining why SingPost agreed to pay an amount tied to FMH’s future performance, Yik said SingPost wanted to hedge its risk to make sure the investment performs as expected.

It is easy to see why SingPost is keen to raise its shareholding in FMH. The Melbourne-based unit has generated a three-year compounded annual growth rate of 28 per cent and 50 per cent in revenue and operating profit, respectively.

FMH’s revenue jumped from A$249 million in FY2020 to A$524 million in FY2022. Operating profit rose from A$17 million to A$48 million in this period. According to Yik, Australia’s fourth-party logistics market is worth slightly under A$1 billion.

Together with CouriersPlease, SingPost’s Australian venture that offers last mile logistics, the group is able to offer the full suite of integrated business-to-business and business-to-customer logistics solutions in the Australian market.

Yik said the system will become a “well-oiled machine” and enjoy a network effect – increased number of participants improve the value of the service. “That is a powerful tool that we believe will be able to provide a lot of value to our customers. In time, that system can ultimately drive the performance of the entire Australian market.”

SingPost’s plan to raise its interest in FMH has been favourably viewed by some analysts. CGS-CIMB’s Ong Khang Chuen said FMH ties in with SingPost’s strategy of transforming into a global logistics enterprise; especially in Australia, where it has established a strong presence after years of investments.

Ong said that the transaction will raise SingPost’s operating profit by 8 per cent for FY2024, without taking into account further profit improvement from FMH.

S&P Global Ratings wrote in a report that SingPost’s decision to further raise its stake in FMH removes some uncertainty over the quantum of cash payments that could be triggered by the put option.

The contributions from Australia to SingPost’s revenue and operating profit, including those from CouriersPlease, have ballooned. They accounted for 42 per cent of revenue in H1 FY2023, up from 17 per cent for the year-ago period; and 56 per cent of operating profit, a jump from 4 per cent.

In contrast, the ratio of contributions from Singapore contracted. Revenue fell from 24 per cent to 15 per cent, and operating profit from 74 per cent to 35 per cent. But Yik was quick to note contributions from Singapore in absolute value have not decreased much; rather, it is contributions from Australia that have risen significantly.

Bullish about the logistics industry’s prospects, Yik noted that while e-commerce might be impacted now that pandemic-induced lockdowns are over, online trading would still increase, albeit at a slower rate.

Apart from the Australian business, SingPost’s two other key pillars are international e-commerce logistics and the Singapore operations.

If market conditions improve, especially with China’s reopening, contributions by the international business will grow at a faster rate, if not as fast as its Australian business, said Yik, because the international market is much bigger than Australia’s.

Yik declined to “speculate” on whether SingPost could spin off its domestic post and parcel business, which is on a secular decline, in the same way that the now-defunct Singapore Press Holdings did with its media business.

Instead, he noted that SingPost has been able to leverage its postal service provider position to access the infrastructure for its domestic e-commerce logistics operations. “We are the only company in Singapore that goes to every address in Singapore… every delivery so long as you make it, do it cleverly, it actually doesn’t cost us… Our intent is to make sure the Singapore domestic market continues to be profitable, continues to be sustainable.”

On challenges, Yik said rising labour and utilities costs affect more than rising interest rates, because “we don’t have significant debt” and most of them are fixed. Therefore, raising efficiency is important. SingPost expects to do that by leveraging synergies between FMH and CouriersPlease when their operations and systems are merged.