• Mixed bag in 2017
• Growth segments have lower margins
• Targets from strategic review to be executed

Mix of Good and Bad in 2017

2017 has been a busy year for Singapore Post (SingPost). At the start of last year, the group completed the issuance of 107.6m shares to Alibaba, who now holds about a 14.5% stake in SingPost. During its 3QFY17 results in Feb, it was disclosed that TradeGlobal, which was acquired earlier, posted an operating loss as it had not achieved the underlying profit assumptions of the business plan which supported the investment. Restructuring of the entity then started.

In May, Lazada Singapore moved its entire warehouse operations to SingPost regional eCommerce logistics hub, boosting utilization rates. In Oct, SingPost officially launched the redeveloped SingPost Centre, along with its Smart Post Office network. Rental income will be supported by this new lifestyle destination in the east.

In Dec, SingPost also announced changes to its small packet services which took effect on 2 Jan. This is in response to higher global postal settlement rates to reflect rising volumes of eCommerce packets and the higher cost of delivering such packets.

Time Needed for Execution of Targets From Strategic Review

Looking ahead, we expect a gradual ramp-up in utilization rates of the log hub, but the environment for logistics as a whole is likely to remain challenging. Margins for this segment are generally low due to intense pricing competition, such as what was witnessed in Quantium Solutions Hong Kong.

For the higher margin mail business, international mail is growing but we note that this has relatively lower margins than the domestic mail segment which continues to see a decline in volumes. For FY18F, we are forecasting flattish underlying earnings with growth in FY19F.

We look forward to positive results from the execution of the group’s targets from its recent strategic review, which should drive earnings and ultimately the stock price. Recall that the themes include 1) winning in the home market, 2) delivering full value from overseas investments, 3) igniting future growth engines and 4) driving cost leadership.

Maintain HOLD with S$1.26 fair value estimate on SingPost.

Source: OCBC Research - 10 Jan 2018