SINGAPORE (June 22): Supply chain disruption has seen Singpost suffer from an international postal backlog as borders remain closed as a result of Covid-19. Yet with the upcoming General Election in Singapore promising a surge in postage, UOB Kay Hian analyst Lucas Teng has maintained his “hold” call on the counter with a target price of 80 cents, representing a 2.6% upside on the stock

According to the Universal Postal Union (UPU), cross-border mail (including letters, parcel and express) experienced a 21% y-o-y decline between 23 January and 14 May due to disrupted flights. An unhindered supply of mail -- for instance, through flight resumption -- and continued reliance on international goods is necessary for international mail volumes to recover to pre-Covid levels. While mail disruption continues to be a challenge for Singpost, adequate mail flow from China has been crucial in maintaining stable demand. 

Singpost’s focus on developing its e-commerce presence could pay off following growing demand for online purchases in Singapore. Online proportion of sales for computer and telecommunication equipment in Singapore rose to 70% in April from 41% in March, while online share of sales for furniture and household equipment rose to 50% from 17% in March. 

Yet, supply chain disruptions could create lag time in terms of deliveries as long as air travel remains restricted. Teng predicts a lagged effect in international mail volume over the next few quarters, meaning that Singpost would take some time to realise the profits made from this e-commerce demand surge. UPU observes that as of May 20, only 1 out of every 2.1 weekly items for export has been marked as received.

In the long-run, Singpost’s profits will continue to be hurt by the increasing replacement of snail mail -- especially business correspondence -- by digital alternatives. Covid-19 will also accelerate this trend, as consumers get more used to living in a digital world and take greater advantage of the ease and convenience of online solutions. Restructuring its business to adapt to this “new normal” could see Singpost incur greater capital expenditure going forward.  

“UPU… notes that the expected scenario is one in which there is an eventual recovery, although insufficient to offset the structural change of postal,” says Teng. He concurs with the UPU’s prediction that purchases through offline channels will recover once circuit breaker measures are fully lifted, whereupon the momentary acceleration in e-commerce parcel volumes will revert to the norm. While an initial drop in letter volumes should also recover, the decline in snail mail is likely to continue its inexorable decline.  

While Singpost has sought to capitalise on the rise of e-logistics, Teng remarks that the firm still faces significant obstacles in entering the industry. “Letterboxes have yet to fully accommodate parcels, and the easy access of retail shopping could be a deterrent for a permanent migration of bulkier e-commerce purchases,” he reports. Additionally, Singpost will have to compete with e-logistics startups like Ninjavan and Grab who are challenging for market share in this market. 

Nevertheless, impending elections in Singapore could lead to temporarily stronger domestic postal volume. Teng notes that previous polls have generally seen a slight in domestic postal volume and temporary improvements in Singpost’s performance, which he attributes to the need to deliver poll cards and election manifestos. Yet should parties turn to digital communication to bypass circuit breaker measures, this short-run surge may not appear as strongly. 

Teng recommends investors looking at Singpost to enter the market at 70 cents. The stock’s valuation is middling, with the 10x FY21F price-to-earnings ratio of its mail business and the 8xFY21F EV/EBITDA both in line with the average of peer firms. Singpost’s capitalisation rate of 5%, however, is a little on the high side for its middling performance, though a lower than expected decline in domestic postal volume could prove a price catalyst for the stock. 

As of 2.35pm, Singpost is trading at 76 cents and offers a dividend yield of 3.55%. Its present price-to-earning ratio stands at 19.40 while price-to-book ratio is at 1.08.