SingPost shareholders’ conundrum on Aussie asset sale: Can company find another golden goose?

[SINGAPORE] Singapore Post (SingPost) shareholders vote on Thursday (Mar 13) on the proposed divestment of the Australian multi-modal national logistics business Freight Management Holdings (FMH).

The proposed deal is material in terms of both the deal value and the contributions that the Australian business has been making to SingPost. Here are some considerations that might help guide shareholders in their decision on the transaction.

However, the weightage of each factor would be different for each shareholder.

Pros:

• Lock in capital gain

A bird in hand is worth two in the bush.

The proposed sale at an enterprise value of A$1 billion (S$856.5 million) will reap a capital gain of S$289.5 million. This is S$22 million lower than the initial S$312.1 million when SingPost announced the unsolicited offer from private equity firm Pacific Equity Partners in December 2024 because the Australian dollar has since depreciated against the Singapore dollar.

SingPost has invested equity amounting to about S$78.6 million in FMH, from when it first took a small stake of 28 per cent in December 2020 to almost fully owning it in December 2023.

This investment Down Under thus provides a return on equity of 3.7 times if the proposed divestment proceeds.

• Lower debt

SingPost had an acquisition debt of A$362.1 million for FMH as at end-September 2024. The A$775.9 million in gross divestment proceeds will enable the group to pare down its Australian-dollar borrowings without any foreign exchange loss.

Cutting debt is important – the cost of borrowing has been eating into SingPost’s bottom line.

This could be a reason for SingPost’s share price being depressed despite a diversified stream of revenue from FMH upon acquiring it.

For H1 FY2025, earnings improved by 97.3 per cent to S$22.6 million, which would have been higher if not for the surge of nearly 70 per cent in finance cost to S$24.6 million.

SingPost’s borrowing costs had risen as a result of the additional loans taken out to bolster its Australian business – the acquisitions of Border Express and an additional stake in FMH.

Its borrowings amounted to about S$867 million while total liabilities were about S$1.7 billion as at end-December. It also has S$250 million of perpetual securities – not considered a debt in accounting terms – which distributes over S$10.8 million in payment annually at an interest rate of 4.35 per cent.

• Special dividend

If the sale proceeds, there could be a special dividend from the disposal gain of S$289.5 million but there are also other needs including working capital, debt reduction and capital for future investment as the group resets its strategy.

If the group decides to give shareholders S$0.01 in special dividend for each share they own, this will cost it S$22.5 million. In other words, the amount will increase in multiples of S$22.5 million for every S$0.01 it dishes out as a special payout.

Given that gains on disposal total S$289.5 million and that there are several competing uses for the money, there is a limit to the quantum of the special dividend SingPost can pay.

Con:

• Hunting for replacement for Australian business

If the sale proceeds, then SingPost will be left with only its Singapore business – a small market and with mail being a drag – and its international business, which operates in a highly competitive space.

Contributions from both have been lower than that from its key earnings driver – the Australian business – to the group’s profit in recent years.

FMH is said to be ranked among the top five of such players Down Under.

According to SingPost’s latest update, the cost of operating the Singapore and international businesses outstripped the rise in revenue, resulting in a 23.8 per cent year-on-year decline in group operating profit to S$21.1 million in the third quarter ended December.

The lower contribution arose from macro-economic pressures, including higher inflation, supply chain disruptions and a highly competitive environment.

In contrast, contribution from the Australian business increased in terms of revenue and operating profit, though it was largely due to the consolidation of Border Express into FMH post-acquisition.

The board has said the group will reset its strategy after selling the Australian business.

However, will the strategy work?

It will probably take some time for a new venture to contribute meaningfully, as SingPost gradually raises its stake – like the prudent approach it took with acquiring FMH.