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Singapore Post Plans to Divest Its E-Commerce Acquisitions: A Good Move?

Singapore Post Limited (SGX: S08), or SingPost, is a mail and logistics company, with four main segments: postal, logistics, e-commerce, and property. In April 2019, SingPost announced a strategic review for its US e-commerce businesses and will commence a sale process of both Jagged Peak and TradeGlobal.

SingPost first took majority stakes in Jagged Peak and TradeGlobal for US$184.4 million in 2015, under former Chief Executive Officer Wolfgang Baier. Baier then quit months after these deals were made and was replaced by Paul Coutts. Investors may be wondering if the intention to divest these two significant acquisitions is a good one. Let’s take a closer look at the numbers.

Segment profitability

I took the liberty of downloading information on each of SingPost’s key segments — postal, logistics and e-commerce — to assess how each of these divisions has been performing over the years. The time period for analysis was between fiscal year 2014-2015 (ended 31 March 2015) and fiscal year 2017-2018 (ended 31 March 2018) as the acquisitions of the two US e-commerce companies were done in 2015.

Source: Singapore Post Annual Reports FY 2015 to FY 2018

A few interesting observations can be made from the above table:

  • The e-commerce segment only performed well in FY 2015. Subsequently, the segment reported an operating loss for three years in a row, with revenue showing flat growth from FY 2017 to FY 2018.
  • Though postal revenue was growing from FY 2015 to FY 2018, operating margin was declining from a high of 30.8% in FY 2015 to a low of 23.7% in FY 2018. The result was that operating profit in FY 2018 was essentially flat when compared to FY 2015, even though revenue from the postal segment increased from S$467.6 million to S$609.8 million.
  • The logistics segment saw a consistent increase in revenue, from S$387.8 million in FY 2015 to S$588.7 million in FY 2018. However, the segment also suffered from declining operating margins — these shrank from 5.6% in FY 2015 to just 1.8% in FY 2018, resulting in operating profit almost halving in FY 2018 as compared to the FY 2015 level.

Divestment of e-commerce — temporary relief?

From the numbers above, it seems that divesting the loss-making e-commerce segments would indeed improve SingPost’s overall group profitability, as the division has been bleeding for three straight years. In hindsight, the decision to purchase these companies may not have been properly considered, or it could also be a case where well-intentioned acquisitions subsequently report teething problems for the acquirer.

However, the divestments may only provide temporary relief for the group, as their other two core segments are also facing declining profitability.

SingPost’s core business facing challenges

In April 2019, Infocomm Media Development Authority (IMDA) imposed a financial penalty of S$300,000 on Singapore Post for not meeting postal Quality of Service (QoS) standards. This was after the company had announced measures (in February 2019) to improve service quality. Apparently, this problem reared its ugly head again recently, when stacks of mail were found at a Tampines HDB block’s void deck, leading SingPost to announce an immediate investigation.

The Foolish bottom line

Though the planned divestments by SingPost are a step in the right direction for the group, the problem with its other two divisions also needs to be addressed urgently. If the QoS standards do not improve significantly in the months to come, SingPost may also find itself being fined heftier amounts by IMDA. This is in addition to the general loss in confidence by the general public in SingPost’s services, pushing them to utilise other methods of mail and parcel delivery instead. Investors should closely monitor the group when FY 2019 earnings are released to assess if there is any improvement in the numbers.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in Singapore Post Limited.