It has been a challenging time for Singapore Post Limited (SGX: S08), or SingPost.
Its share price has also fared poorly, falling by nearly 23% in the past year and losing close to two-thirds of its value within the last five years.
The weak performance was because of the drag from its Post and Parcel division, which saw its first full-year operating loss of S$15.9 million for FY2023.
SingPost’s board of directors has initiated a strategic review of the group’s portfolio of businesses and appointed BofA Securities as its exclusive financial advisor.
This review aims to enhance shareholder returns and ensure the group is “appropriately valued”.
We dig deep into SingPost’s business and strategic review to see if its share price can regain its former glory.
The raising of postage rates
SingPost’s Post & Parcel division has seen better days.
Back in FY2020, operating profit was as high as S$119.8 million but this has steadily declined to S$24.9 million by FY2022.
The volume of letters and printed papers continued its decline while international post and parcel revenue was negatively impacted by COVID-related lockdowns in China.
SingPost announced that postal rates will be adjusted upwards from 1 January this year to incorporate the new GST increase and to account for the inflationary effects on manpower, fuel, and electricity.
The increase, which applies across basic mail services, tracked mail and registered services, is the first since 2014.
Earlier this month, the government said it will consider allowing the group to introduce postal rate adjustments in the future.
This move is to allow SingPost to operate a viable business without government intervention as domestic letter volumes have nearly halved from 490 million in FY2015 to 260 million in FY2022.
In this regard, the Infocomm Media Development Authority (IMDA) will work with SingPost to review its costs and operations to “optimise and automate” postal services for greater cost efficiency.
This announcement is promising but could be a case of “too little, too late” for the group’s Post & Parcel division.
A slow pivot towards logistics
SingPost’s Annual General Meeting presentation showed how its business has evolved over the years with a shift from Post & Parcel to Logistics.
Back in FY2020, Logistics made up just 38% of the group’s revenue but by FY2023, it constituted 70% of total revenue.
The operating profit for the Logistics division has also been steadily rising.
From an operating loss of S$5.5 million in FY2020, the division posted a strong turnaround over the next three years, ending FY2023 with an operating profit of S$84.7 million.
The bulk of this improvement was contributed by Freight Management Holdings (FMH) in Australia.
FMH has performed very well in FY2023 with revenue more than tripling year on year to S$595.3 million and net profit soaring 258% year on year to S$33.5 million.
These numbers mean that SingPost is slowly morphing from being a postal player to a logistics one as the proportion of revenue and operating profit from logistics increases over the years.
Objectives of the strategic review
By now, it should be clear that the Post & Parcel division is struggling and that the future for SingPost lies in its logistics division.
The strategic review aims to address what is core and non-core and may involve the divestment of non-core assets that feature sub-par returns.
By doing so, capital can also be recycled from lower-yielding assets to those with better prospects and future returns.
The review will also optimise the group’s balance sheet which held S$495.7 million of cash along with S$624.4 million of debt as of 31 March 2023.
FY2023 saw finance expenses jump 32.8% year on year to S$19.6 million, making up 21.1% of the group’s operating profit.
The strategic review will also reset SingPost’s dividend policy.
Management expects the review to be completed within the current financial year ending 31 March 2024 and the recommendations will be presented to the board of directors.
Get Smart: A major transformation may occur
Investors need to be patient and wait for the outcome of the strategic review.
In the meantime, SingPost’s FY2024 earnings are unlikely to show a marked improvement as they will still be weighed down by the Post & Parcel division.
A major business transformation could be in the works, though.
Should SingPost divest its loss-making Post & Parcel division, the market could re-rate the group and its share price may surge in tandem.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.