SINGAPORE (Feb 10): Analysts are cutting their target prices on Singapore Post (SingPost) by as much as 11.5%, as the group’s post & parcel and logistics segments remain weak.

DBS Group Research has cut its target price to 85 cents from 96 cents previously, while OCBC Investment Research has lowered its target price to 96 cents from $1.02 previously, and UOB Kay Hian has dropped its target price to 99 cents from $1.04 previously.

All three brokerages are maintaining their “hold” calls on SingPost.

The recommendations come after SingPost on Feb 7 announced a 39.3% plunge in earnings for 3QFY2019/20 ended December 2019 to $30.5 million, mainly due to the absence of exceptional gains amounting to $31.8 million recognised a year ago.

Excluding one-off items as well as losses from discontinued operations, underlying net profit for 3QFY2019/20 was $31.2 million, some 5.1% lower than $32.9 million a year ago.

See: SingPost reports 39% drop in 3Q earnings to $30.5 mil on absence of one-off gains; maintains interim dividend of 0.5 cent per share

“Domestic letter volumes have seen accelerated decline in the last few quarters, while challenges in freight arising from ongoing trade war and potential impact on global supply chains arising from the coronavirus situation are near-term concerns,” says DBS lead analyst Lim Rui Wen in a Feb 7 report.

Further, the way Lim sees it, SingPost faces two key headwinds: higher terminal dues adversely affecting international mail volume which has been the key growth driver so far, and higher operating costs in order to improve service quality in Singapore.

In 3QFY2019/20, SingPost reported that operating expenses had increased 3.5% to $318.4 million “due to significant investments to improve service levels”.

Labour & related expenses also climbed 3.9% on the back of higher remuneration and the hiring of additional postmen for its Singapore postal operations.

On the ground, however, customers have been far from convinced of SingPost’s service quality.

Investor confidence has also remained battered, following some bad publicity on service lapses, including a series of incidents where postmen were caught dumping mail instead of delivering it.

SingPost had been fined a total of $400,000 by the authorities for failing to meet delivery standards in 2017 and 2018.

See: SingPost banks on postal services as new CEO battles to regain public trust

Meanwhile, its two floundering e-commerce businesses in the US – Jagged Peak and TradeGlobal – have filed for voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code.

Following the bankruptcy announcement in September 2019, SingPost has deconsolidated the financials for the US businesses from the rest of the group, and will no longer recognise profit or loss from the US subsidiaries.

“We continue to see the decline in letter mails this quarter and are likely to see this structural headwind to continue,” says OCBC analyst Chu Peng in a Feb 10 report. “While we see domestic ecommerce-related volumes growing double-digit, it grew from a much lower base than that of letter mail which continued to form the majority of revenue and volume.”

Over at UOB, analyst Lucas Teng has cut his earnings forecasts for FY2020 to FY2022 by 4.0-4.8%.

“We factor in a larger decline in domestic postal given the accelerated drop in letter mails seen this quarter,” Teng says. “Going forward, we expect domestic postal costs to be trimmed to help arrest the top-line decline, though it will take some time to see its effects.”

“It may take SingPost 2-3 years to overcome these challenges by investing in technology, in our view. Real growth drivers besides cost-reduction programme over the next 2-3 years are limited for now,” adds DBS’ Lim.

Shares in SingPost closed 1.7% down, or 1.5 cents lower, at 87.5 cents on Monday.

According to DBS valuations, this implies an estimated price-to-earnings (P/E) of 18.6 times, a price-to-book value (P/BV) of 1.5 times, and a net dividend yield of 3.9% for FY2020F.