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(Nov 27): Singapore Post has declared an interim dividend of 0.5 cent a share, to be paid out on Dec 8, for 2QFY2018 ended Sept 30. That is lower than the interim dividend of one cent that the postal company paid last year. SingPost has declared total dividends of one cent so far for 1HFY2018 ending March next year, lower than the payout of 2.5 cents in 1HFY2017.

The lower payout can be traced to the company’s falling earnings as it transforms its business to carry more parcels and fewer letters. For 2QFY2018, SingPost’s revenue grew 10.2% y-o-y to $354.7 million. However, earnings fell 9.5% to $28.5 million. The company’s bottom line was negatively impacted by a doubtful debt provision of $5.2 million for a key customer of Quantium Solutions Hong Kong. Quantium Solutions is SingPost’s logistics subsidiary.

There were, however, some bright spots. Revenue from the postal segment grew 16.9% y-o-y to $148.3 million. Operating earnings rose 5.3% to $35.1 million, the first increase in five quarters. Revenue from e-commerce declined marginally, by 0.8%, to $63.5 million. But operating losses narrowed to $2.9 million, from $6.8 million the year before.

Most analysts are expecting better performance from SingPost this quarter, on the back of online shopping events such as Black Friday and Cyber Monday. China’s Alibaba Group Holding recently announced a 39% rise in gross merchandise volume for its Singles’ Day shopping event last month. SingPost handled three to five times the normal volumes for the occasion.

“[Singles’ Day] volumes could drive [ postal] revenue in the [third quarter],” DBS Group Research head of Singapore equity research Janice Chua tells <i>The Edge Singapore</i>. DBS has a “hold” call on the stock, with a price target of $1.23.

While revenue is expected to grow, Chua warns operating margins may continue to see some pressure as the international terminal dues system takes effect from Jan 1 next year. “SingPost management has not quantified the numbers, but we think it may entail downside risks to our forecasts,” she adds. Member countries of the Universal Postal Union agreed last year on a new remuneration system. Starting in 2018, bulky letters and small packets will be compensated differently from other letter-post formats.

SingPost’s operating margins for postal services declined for the sixth consecutive quarter from 24.2% in 1QFY2018 to 23.7% in 2QFY2018. “We should not expect the current level of group operating margins to stay for the medium term because they are getting more business from international mail business, which has thinner margins compared with their traditional domestic mail,” says Valerie Law, a senior investment analyst at an Asian private fund, who provides insights on Smartkarma. Law adds that the domestic mail segment generates double- digit margins on earnings before interest and taxes.

Meanwhile, some analysts see SingPost’s e-commerce business breaking even by FY2019. Maybank Kim Eng Research analyst John Cheong notes that losses at TradeGlobal, SingPost’s e-commerce subsidiary, have narrowed. Another subsidiary, Jagged Peak, has booked new customers and higher volumes of sales. Cheong has a “buy” call on the stock, with a price target of $1.50. DBS expects the e-commerce business to turn in operating earnings of $1.4 million for FY2019 on the back of revenue of $288 million.

An additional boost to the bottom line could come from the new Singapore Post Centre, a mall adjacent to the group’s headquarters in Paya Lebar. It is 80.4% occupied and analysts expect it to generate about $17 million in revenue a year.

Of concern, however, is SingPost’s performance in logistics. Excluding the doubtful debt provision, the logistics segment would have reported operating earnings of $1 million. That is relatively low, according to some market watchers. They cite competitive pressures overseas, from both international postal services providers as well as start-ups.

“We expect near-term pressure for Quantium Solutions to persist, while the regional e-commerce logistics hub could see higher utilisation from a seasonally strong third quarter,” says CIMB Research in a Nov 15 report. The newly launched hub, in Tampines, is currently 79% utilised.

OCBC Investment Research analyst Low Pei Han suggests SingPost has little choice but to accept weaker margins in the logistics space for now. “The e-commerce and logistics space is too important to ignore. As SingPost continues its transformation, investments are required, and capital expenditure is likely to eat into profits in the meantime,” Low says. “There is a possibility of a winner- take-all situation. SingPost can aspire to such a pole position, given its strong infrastructure backbone in Singapore and some parts of the region.”

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