Slowing growth in domestic mail revenue and international mail

DBS analysts Sachin Mittal and Lim Rui Wen have maintained their “fully valued” rating on Singapore Post (SingPost) with the same target price of 64 cents.

The analysts note that the company is experiencing a structural decline in high-margin domestic mail revenue driven by the increasing pivot to going online.

Operating profit from its international mail segment has also slowed and is unable to mitigate the drop from domestic mail.

“Growth may only slowly recover in 2H2021F as economic activities resume, but held back by intense competition and the expansion of the tax net on cross-border e-commerce deliveries,” say Mittal and Lim in a report dated Sept 17.

“According to management, volumes may temporarily be diverted away from Singapore due to disruption in international air freight out of Changi Airport,” add the analysts who justified their recommendation due to the “lack of near-term catalysts”.

Key catalysts, they say, include stabilisation of post and parcel operating profit.

The rating also comes after SingPost announced on Sept

15 that it will be flattening its price structure for domestic and international package and parcel deliveries.

The company has also reduced its turnaround time for basic packages to be delivered within two working days instead of three previously.

On that, Mittal and Lim believe that SingPost may be able to enjoy growth in its mail volumes as it seeks to capitalise on the rising trend of e-commerce packages with its revised rates going forward.

The analysts also note that e-commerce sales — at only 4% of retail sales in Asean (compared to around 24% in China) — has plenty of room to grow.

“Venture capitalists are funding loss-making third-party (3PL) regional logistics players in the hope of attaining scale to generate profits in a few years’ time. Many small players are also subsidising e-commerce deliveries to increase their market share. Hence, competition in this space may remain irrational unless there is a change in the funding landscape,” they say.

As SingPost continues to streamline its operations, Mittal and Lim believe the changes may enable the company to seek higher volume growth with lower delivery rates.

“We note that some players in the sector continue to undercut each other to gain market share and believe there may still be heated competition locally between the players as package volumes continue to ride on the e-commerce volume growth,” they add. — Felicia Tan