1 Reason to Be Optimistic for Singapore Post Limited  

Shares of Singapore Post Limited (SGX: S08) have declined by over 21% from their 2016 peak.

Singapore Post is transitioning from a traditional postal services provider to a logistics and eCommerce services provider. But the change has not come easy.

In the fourth quarter of Singapore Post’s fiscal year ended 31 March 2017 (FY2016/17), the company took a $185 million impairment on its 2015 acquisition of TradeGlobal. This led to an 87% fall in Singapore Post’s profit for FY2016/17. The charge was taken after TradeGlobal failed to meet the company’s growth expectations.

But amid the gloomy clouds lies a silver lining.

The AliBaba Effect

The slide below shows the different businesses that fall under Singapore Post’s traditional Postal business: domestic mail, international mail, and post office products and services.

Source: Singapore Post’s earnings presentation

Domestic mail (think snail mail) revenue is on the decline. But this decline was being mitigated by a strong rise in international mail (think eCommerce parcels) revenue. In fact, international mail revenue exceeded domestic mail revenue in FY2016/17. In Singapore Post’s recent fiscal fourth quarter earnings briefing, deputy chief executive officer and chief financial officer, Mervyn Lim, noted:

“Domestic mail revenue continued to decline with more companies implementing e-statements. This was mitigated by the increase in International mail volumes, largely driven by cross-border eCommerce-related deliveries from the Alibaba Group.”

Singapore Post has a partnership with China’s eCommerce giant, Alibaba Group. From the quote above, we can see how this has benefitted Singapore Post. Lim added:

“Our partnership with Alibaba remains strong.

Alibaba took a 34% stake in Quantium Solutions International and increased their shareholding in SingPost to 14.4% in October 2016 and January 2017 respectively.”

Quantium Solutions International is subsidiary under Singapore Post’s Logistics segment. The rise in international mail revenue does come with a downside. The profit margins for international mail is not as good as domestic mail. From the slide above, we can see that operating profit from the Postal segment in FY2016/17 fell despite the slight increase in revenue.

If international mail volume continues increasing, it is possible that profits for the Postal segment will eventually stabilize. That moment has not arrived yet, but it could be something to look out for.

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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.