• Singapore Post's 3QFY20 results in-line; earnings decline reflect domestic mail and logistics weakness.
• We lower our FY20-22F EPS forecasts by 4.2-8.2% on potential trade and logistics disruption in a prolonged coronavirus situation.
• Maintain ADD on medium-term postal initiatives, 4% yield and valuation of close to 1 s.d. below historical mean.

3Q20 in Line (-5.1% Y-o-y, +16.5% Q-o-q)

• Singapore Post (SGX:S08) reported a 3QFY3/20 underlying net profit of S$31.2m, up 16.5% q-o-q due to seasonality, but down 5.1% y-o-y as the absence of S$12.8m US ecommerce loss was offset by weaker postal operations.
• 9MFY20 core PATMI of S$83.6m (-2.4% y-o-y) met our/consensus’ full-year expectations at 77%/76%.
• 3Q20 interim DPS of 0.5Scts was unchanged (see SingPost Dividend History); Singapore Post continued to be in a net cash position as of Dec 19.

Weaker Postal and Logistics Performance, Property Held Steady

• We saw international mail topline increase to S$148.2m (+6.1% y-o-y) in 3Q20, thanks to stronger cross-border ecommerce-related deliveries, mitigating the accelerated decline in domestic letter volumes (-13.8% y-o-y). Higher terminal dues and costs incurred to improve service quality standards weighed on post and parcel operating margin (3Q20: 18.0%, 3Q19: 22.3%).
• Singapore Post’s logistics arm swung into a slight operating loss of S$0.7m (3Q19: S$0.5m, 2Q20: -S$0.9m) on lower freight forwarding revenue (Famous Holdings), AU$ depreciation vs. S$, and Australia bushfire impact (Couriers Please).
• Quantium Solutions (QSI) showed signs of improvement as 3Q sales rose 25.6% y-o-y on new customers in Singapore and North Asia.
• Property segment recorded stable OP of S$13.9m as SingPost Centre retail mall and office remained close to full occupancy.

Trade and Logistics Disruption From Novel Coronavirus

• The cancellation of several international air services and suspension of certain postal services (particularly in North Asia countries) caused delays in processing and delivery of all inbound and outbound postal items.
• Coupled with the potential manufacturing slowdown in China and the disrupted Cainiao logistics network, we believe Singapore Post’s post and logistics earnings could come under pressure for possibly the next two quarters. About 50% of its international mail volumes are transshipments and driven by Alibaba, while HK is a major market for its QSI business.

Reiterate ADD

• We continue to see near-term headwinds for Singapore Post and cut our FY20-22F EPS by 4.2- 8.2%. Maintain ADD with Target Price SGD1.02 based on medium-term postal initiatives (smart letterboxes, new product packaging and revised pricing), 4% dividend yield and bottoming-out valuation (close to 16.1x FY21F P/E, 1 S.D. below historical mean).
• Synergistic M&As and faster value unlocking from its property portfolio are key re-rating catalysts.
• Downside risks: poor macro outlook, protracted trade slowdown and coronavirus disruption.

Source: CGS-CIMB Research - 7 Feb 2020