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1 Reason to be Optimistic About Singapore Post Limited  

Shares of Singapore Post Limited (SGX: S08) have declined by over 23% since the start of 2016.

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

In the fourth quarter of its fiscal year ended 31 March 2017 (FY16/17), 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 FY16/17. The charge was taken after TradeGlobal failed to meet the company’s growth expectations. Fortunes did not improve in the first quarter of FY17/18. Singapore Post posted a 23.2% decline in operating profits.  

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, post office products and services.

Source: Singapore Post’s earnings presentation

As you can see, domestic mail (think snail mail) is on the decline. But that decline was mitigated by a strong rise in international mail (think eCommerce parcels) revenue. In fact, international mail revenue exceeded domestic mail revenue for the fiscal first quarter.

In Singapore Post’s first-quarter briefing, chief financial officer Mervyn Lim said:

“In the Postal segment, Domestic mail revenue continued to decline with more companies implementing e-statements. This was offset by strong growth in International mail revenue which was driven by higher crossborder eCommerce deliveries, especially with higher volumes from the Alibaba Group”

Singapore Post has a partnership with China’s Alibaba Group. From the above, we can see how this has benefitted Singapore Post. In the previous quarter, Lim had noted:

“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.

But the rise in international mail revenue does come with a downside. The profit margins for international mail is not as good as domestic mail. Chief executive for postal services, Woo Keng Leong said:

“On the margin for international transhipment mail, as we always said, the international mail transhipment margin is relatively low as compared to domestic mail.

I must say that the margin remains more or less stable. While we are working on finding the most cost-effective way as far as routing, as far as settlement rates are concerned.

So it’s more or less stabilized.”

The margins might have stabilized, but it might not be enough to offset the decline in profits at the moment. For FY17/18, Lim guided towards lower margins for the postal segment:

“The International mail transhipment market remains highly competitive, and margins are relatively low. With the shift in mix towards lower margin International mail, blended Postal margin is expected to decline.”

From the slide above, we can see that postal’s operating profit in fiscal first quarter fell despite the increase in revenue. If the international mail volume continues increasing, it is possible that the profits 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.