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SingPost’s yield seen stable even as company bolsters Singapore operations

Trinity Chua
Trinity Chua • 7 min read
SingPost’s yield seen stable even as company bolsters Singapore operations
SINGAPORE (June 24): Singapore Post’s dream to transform into an e-commerce play in the US came to an end when Amazon.com turned up at its door, literally.
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SINGAPORE (June 24): Singapore Post’s dream to transform into an e-commerce play in the US came to an end when Amazon.com turned up at its door, literally.

In May, Amazon held a groundbreaking ceremony for its US$1.5 billion ($2.05 billion) logistics superhub in Cincinnati, promising to reduce the company’s reliance on third-party providers. The air hub, scheduled to open in 2021, is less than an hour’s drive from SingPost’s e-commerce and logistics subsidiary, TradeGlobal.

“[The move by Amazon] escalated labour cost [in the industry]. [And because we have] long-term contracts with a lot of our customers, we cannot pass much of that labour cost increase on, which squeezed our margins,” says Paul Coutts, the CEO brought in to turn the ailing postal company around in 2017. In particular, he was tasked with fixing its loss-making e-commerce and logistics operations in the US.

Amazon is hiring more than 2,000 people for its Cincinnati air hub. It first announced plans to build the three million square foot facility in 2017 — the same year SingPost recorded a massive impairment charge of $185 million for TradeGlobal. TradeGlobal had incurred full-year losses of $25.8 million after losing a few major customers.

In April this year, SingPost said it would sell TradeGlobal and US e-commerce software and services provider Jagged Peak, which were supposed to drive new revenue growth for the postal services company, as it faced margin pressures from decreasing mail volume.

For FY2019 ended March, SingPost recorded total impairment charges of $98.7 million for the two subsidiaries, consisting of $67.6 million for goodwill and intangible assets, and $31 million for property, plant and equipment. The postal company bought majority stakes in the two e-commerce businesses for US$184 million in 2015. “It will take some time for the business to turn around, close to five years, with no real guarantee of success,” says Coutts. He declined to disclose the amount spent on the turnaround plan in the US before the company decided to bail out.

In FY2019, SingPost’s e-commerce revenue was stable at $249 million, but operating losses widened 165% y-o-y to $52 million. This was in contrast to the year before, when operating losses for the e-commerce business narrowed to $16.7 million from $33.8 million. SingPost’s total revenue rose 2.9% y-o-y in FY2019 to $1.6 billion, but earnings plunged 86% to $19 million, partly due to the impairment charges for TradeGlobal and Jagged Peak.

Without its US operations, market watchers are hopeful that the company can recover, bolster its operations in Singapore and continue to pay stable dividends. SingPost paid 3.5 cents a share in FY2019, a payout ratio of about 70%, similar to that in the past three years. It has a yield of 3.66%.

UOB Kay Hian analyst Lucas Teng sees little change to SingPost’s dividend payout as its underlying profit may improve with the planned divestment of its US e-commerce units. This will help offset some of the drag from service enhancements in Singapore, he says.

He notes that SingPost’s operating cash flow before working capital has been fairly resilient. In the past four years, there was a slight drop in working capital only in FY2019. Meanwhile, capital expenditure on the service enhancement initiatives will not be too hefty. SingPost had free cash flow of $120.9 million in FY2019, down from $136.1 million the year before.

Another analyst expects SingPost to be in “fire-fighting” mode for the next six to 12 months. Whether it can recover partly hinges on its ability to divest its US business.

“I think the market is expecting a divestment in six to nine months. There is likely to be upside if they can do so in less than six months. Operating losses for FY2019 are about $50 million. Conservatively, an average of the losses in recent years may suggest a range of $35 million to $45 million if they cannot divest the assets,” notes UOB KayHian’s Teng.

What’s next?

National postal companies around the world have come under pressure as revenue takes a hit from a drop in traditional mail services. Competition from start-ups in the logistics space also adds to their woes. Over the last seven years, a total of US$6 billion has gone into backing start-ups in the parcel and express sector, according to Boston Consulting Group.

As a result, postal companies such as SingPost have tried adopting a mix of e-commerce and logistics divisions to compete. With its US adventure far from a success, Coutts says SingPost will focus on its core market, Singapore. It will also gradually expand to Southeast Asia, although this move is likely to take time and may be just as challenging. E-commerce in Southeast Asia is still fragmented and highly competitive.

“You need to have the right mix of light and heavy assets. In Singapore, we are more of a heavy-asset play,” Coutts says. “[In Southeast Asia], we want to be a tech provider. For me, the smart play is to have an ecosystem that is not wholly owned, is fairly asset-light, that you can switch or optimise reasonably quickly.” For instance, it partnered with Synagie to offer cloud-based warehousing for small businesses in the region.

SingPost has signed a memorandum of understanding with Pos Indonesia, express parcel operator JNE and Pos Malaysia. It also has a stake in Malaysia-based last-mile logistics provider GDEX, or GD Express Carrier. SingPost hopes to partner with these companies by providing them with technology services. These technologies are like to be trialled in Singapore before being rolled out through the company’s partners in Southeast Asia.

For instance, SingPost launched its proprietary logistics software Last Mile Platform (LaMP), which consolidates various last-mile delivery services, such as courier services, parcel lockers and brick-and-mortar collection points, onto a single platform. It currently has a collaboration with Singapore Telecommunications in Singapore. Coutts aims to launch the platform in Southeast Asia by August.

“It could be a licensing agreement or we make a margin on the transaction cost of the postal delivery,” he says. The business is likely to be parked under the logistics division. The company is not expecting to incur any capital expenditure for these partnerships.

When asked about the financial impact of these plans, Coutts says they are “medium- to long-term strategies”. In FY2019, revenue from the company’s logistics division was stable at $496.1 million and operating losses narrowed 76.2% y-o-y to $2.5 million.

Is Singapore enough?

SingPost generates more than half of its revenue from the Singapore market, which is also the biggest contributor to the group’s free cash flow. The largest share of its revenue comes from postal services; in FY2019, revenue was $764.8 million, up 4.1% from the year before. Operating profit for the segment rose 1% y-o-y to $165.9 million. But margins have been falling over the years amid a decline in the volume of domestic mail.

SingPost has come under fire for lapses in its local postal delivery services: There had been incidents of postmen dumping mail instead of delivering it. The company was fined about $400,000 as a result. It has introduced a number of measures since then, such as hiring more delivery staff. It also plans to introduce a trackable letterbox delivery option, streamline its delivery operations and allow consumers to rate its delivery staff.

These measures will certainly increase costs for SingPost and most analysts do not see immediate growth opportunities for the company. When asked about future areas for growth, Coutts says the management is reviewing its options.

“Long term, the company has mentioned that they are still looking at the e-commerce space, though the direction still lacks clarity. A lower-hanging fruit is in the automation of postal [services], making it more efficient in logistics and transport, and attempting to win back some market share. However, that does not appear to be as exciting,” remarks UOB’s Teng.

SingPost will continue to face more challenges ahead. First, there will be higher terminal dues for international mail volume, which may hinder growth for the group, according to DBS analyst Sachin Mittal, who has a “hold” call on the stock and a price target of 96 cents. SingPost is trading at 95.5 cents. It will also incur higher operating costs as it redeems itself in the Singapore market. “In the long term [at least two to three years], we expect SingPost to overcome these challenges, given its strong balance sheet, e-commerce logistics hub in Singapore and strong last-mile delivery in Singapore and Australia,” he says.

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