• SingPost (SGX:S08)'s 4Q20 underlying profit of S$16.6m (+15% y-o-y, -46% q-o-q) was below our estimate of S$24m, final DPS of 1.2 Scts was below our 2-Sct estimate.
• To stage a gradual post-COVID recovery from continuous decline in the operating margins; FY21F/22F earnings cut by 20%/19%.

COVID-19 Impact and Dividend Cut

• SingPost's 4Q20 underlying profit of S$16.6m (+15% y-o-y, -46% q-o-q) was 30% below our estimate of S$24m. There was S$9.4m one-off losses in 4Q20 from items such as asset impairment, fair value changes on investment properties and M&A related professional fees, which is not included in the underlying profit.
• The result was weak mainly due to operating profit margins of the Post and Parcel segment dropping from 18% in 4Q19 to 10% in 4Q20 versus our expectations of 15% margins. Operating profit for the segment tumbled to S$18m in 4Q20 from S$34m in 3Q20. This was due to the two following key reasons:
  1. decline in high-margin domestic mail accelerating to 15% y-o-y compared to 4% decline last year as many organisations go paperless to save the environment and reduce costs. SingPost also saw a big decline in admail volume which is a function of promotions and sales.
  2. International mail revenue was flat y-o-y compared to 9% growth last year as COVID-19 adversely impacted cross-border e-commerce related deliveries due to the grounding of airlines and halting of postal operations. International mail profitability is also hurt by rise in terminal dues from Jan 2020 onwards.
• Final dividend per share (DPS) of 1.2 Scts was below our 2-Sct expectation. This brought SingPost's FY20 full-year DPS to 2.7 Scts versus our expectations of 3.5 Scts – at the lower end of the guidance of 60-80% payout ratio.
• SingPost is acting conservatively to ready itself for potential acquisition opportunities, in our view.

Downgrade to FULLY VALUED With Revised Target Price of S$0.64

• COVID-19 has led to an accelerated decline in high-margin domestic mail revenue which comprises the bulk of SingPost’s operating profit. This is a structural shift in our view. Cross-border e-commerce related deliveries, on the other hand, are likely to see accelerated growth in 2HFY21F once economic activities resume, although their thin margins in the wake of higher terminal dues from Jan 2020 onwards, might not be enough to stablise SingPost’s operating profit.
• We project a 13% drop in SingPost’s operating profit in FY21F (vs 3% growth earlier) followed by a 4% growth in FY22F (vs 3% earlier). We expect the stock to trade near +2 standard deviation (SD) yield of 4%.

Where We Differ: We Are 5%/14% Below Consensus FY21F/22F Earnings

• With e-commerce sales as a percentage of retail sales at only 4% in ASEAN (vs ~24% in China), e-commerce in ASEAN has ample room to grow. Venture capitalists are funding loss-making third-party (3PL) regional logistics players in the hope of attaining scale to geenrate profits in a few years. Many small players are also subidising e-commerce deliveries in the hope of attaining scale. Hence, competition in this space may remain irrational unless there is a change in funding landscape.

Potential Catalyst

• With many smaller players struggling in the wake of COVID-19, SingPost could acquire players in the e-commerce logistics space in Asia.
• In the medium term, we believe potential divestment of SPC mall could be a catalyst.

Source: DBS Research - 11 May 2020