• Supply chain disruption continues to affect mail delivery across borders. While e-commerce demand has been elevated during the circuit breaker period, volumes will likely see a lagged effect as mail delays get progressively cleared.
• On the domestic front, delivery of election materials could help provide some temporary support to letter volumes.
• Maintain HOLD on SingPost and target price of S$0.80.
• Entry price: S$0.70.

International Postal Still Hit by Supply Chain Disruption

• According to a recent report by Universal Postal Union (UPU), cross border exchanges of mail items (letters, parcels and express) have decreased 21% y-o-y between 23 Jan 20 and 14 May 20 due to network disruption. Supply of mail would need to be unhindered, such as the resumption of flights, as well as the continued reliance of international goods in order to drive back international volumes. International postal and parcel services for SingPost (SGX:S08) continue to be disrupted in some overseas locations, although postal flow from China is currently adequate.

Election Bump on the Horizon?

• Recent safety measures have been drawn up to ensure safe elections during the COVID-19 pandemic. Domestic postal volumes have generally increased slightly during previous elections as we note temporal improved performance in the corresponding periods; possibly taking the form of poll cards and election manifesto deliveries. However, the COVID-19 situation could affect the above trend if increased digital communication is utilised instead, such as video conferencing.

E-commerce Demand Boost But Supply Chain Will Likely Take Time to Clear Deliveries

• International post and parcel deliveries will continue to be affected by supply chain disruptions if air travel remains restricted. According to the stranded mail ratio from UPU, as of May 20, for every 2.1 weekly items for export, only 1 has been notified as received.
• While e-commerce demand has risen substantially during the circuit breaker period, deliveries will still experience delays and we think the impact from international mail could see a lagged effect over the next few quarters.
• As a reference for Singapore, online proportion of sales for computer and telecommunication equipment rose to 70% in Apr 20 (Mar 20: 41%) while online share of sales for furniture and household equipment rose to 50% (Mar 20: 17%).

Structural Decline Still a Drag

• Letters, especially business mails, will likely continue its structural decline, given readily available digital alternatives, plus the COVID-19 pandemic could encourage further electronic mail substitution. The elections, while positive, could only be a temporary support for volumes, in our view.

New Normal for Postal?

• The new normal for postal could entail different scenarios, according to UPU, depending on the new level of adoption of e-commerce parcel deliveries as well as the postal infrastructure in place to seize upon any enhanced level of e-commerce parcel deliveries. The UPU report notes that the expected scenario is one in which there is an eventual recovery, although insufficient to offset the structural change of postal. It describes the scenario as one where stay-home restrictions are relaxed and purchases through the offline channel pick up, while the momentary acceleration in parcels reverts to the long-term trend.
• Conversely, in the letter-post segment, the initial drop in volumes eventually reverts to the long-run decline (see graphical representation in PDF report attached below). We opine that this is likely to be a reasonable case for SingPost currently, given that letterboxes have yet to fully accommodate parcels, and the easy access of retail shopping could be a deterrent for a permanent migration of bulkier e-commerce purchases.

Maintain HOLD

• Maintain HOLD and SOTP-based target price of S$0.80. We value:
  1. SingPost's mail business at 10x FY21F PE;
  2. SingPost's logistics business at 8.0x FY21F EV/EBITDA, both in line with peers’ average; and
  3. SingPost's property at cap rate of 5%.
• Entry price is S$0.70.
• Share price catalysts: Lower-than-expected decline in domestic postal. M&As.

Source: UOB Kay Hian Research - 19 Jun 2020