Is Singapore Post Limited’s Traditional Postal Services Business Feeling the Burn of Disruption?

The postal services business has been the bedrock of Singapore Post Limited (SGX: S08) for many years. But this might be changing in the future.

In its latest Annual General Meeting (AGM) held in mid-July this year, Singapore Post’s chairman Simon Israel did not hold back in sharing his thoughts about Singapore Post’s future challenges:

“Looking forwards however, we need to recognise that our domestic mail business, on which we are still highly dependent, is a burning platform, subject to the forces of digital disruption.”

This could have severe implications for the company. From the graph below, we can see that the Postal segment’s underlying profit makes up almost all of Singapore Post’s underlying operating profit for the second quarter of its financial year ending 31 March 2017 (FY2016/17).

Source: Singapore Post’s earnings presentation

Singapore Post will need to be prepared for the change. During the AGM, Israel also said:

“As corporate Singapore becomes increasingly digital and as the Government leads us towards a Smart Nation, we will see a tipping point in the domestic mail business and an accelerating decline – this may well come sooner rather than later and we need to be prepared for it.”

In FY2016/17’s second quarter, Singapore Post’s covering chief executive and chief financial officer Mervyn Lim added that there is no clarity on the tipping point yet. Domestic mail volume has fallen, though. Lim explained:

“… the reason why Domestic mail has gone down again, is no surprise, it is just the way in which the trend is going throughout the world; Singapore is no exception.

But in particular when you look at Q1 which is 4.3% and you look at Q2 which is 5.5%, you would see that fall has also partly been due to what we call e-substitution. E-substitution is where in particular, government and business mail has taken a fall and so what we are doing is not simply reacting to that fall, but we are trying to pro-act.”

Singapore Post is working on managing costs at its postal services business as the transition from traditional mail to digital happens. Woo Keng Leong, chief executive for postal services, added his thoughts:

“ …. one is of course the e-substitution which is a world trend.

I think a lot of the bulk mail centres like the banks and the utilities companies are actually going digital so this is something that…we still try to manage our costs so that… Among managing the costs, there are a few things.

Over at the post office side, we are actually introducing the one man half day post office; I think that is one way to manage our costs.

And then we also try to use technology to drive productivity so one of them will be the S.A.M machine – that’s the self-service automated machine, so we’ll be replacing the machines to improve productivity.

We are actually certainly aware of the margin pressure but having talked about the cost savings, I think we also need to strike a very good balance between reducing costs and maintaining our service quality. We remain committed to provide quality service for our people.”

In all, Singapore Post appears to be looking to weather the storm of disruption by limiting the amount of damage it takes on the underlying profits at its postal services business. As domestic mail volumes decline, the company might have to seek new avenues for growth. On that, I will leave the discussion for another article.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.