One of the most basic rules in investing is to understand how a business makes money. If you have no clue how a business generates revenue, you should probably stay away from it because you either don’t know enough about the business to understand it, or the company is attempting to confuse investors through a possibly suspicious business model.
With this in mind, let’s take a dive into Singapore Post Limited (SGX: S08), or SingPost, and find out how it generates revenue. SingPost is Singapore’s postal service provider and is also involved in pioneering and leading in e-commerce logistics and providing innovative mail and logistics solutions in Singapore and other countries.
The group has four main divisions: post and parcel, logistics, property, and what it calls its “USA business.” Here is the revenue breakdown for SingPost for its most recent quarter (Q1 2020).
SingPost’s four divisions
Post and parcel is SingPost’s largest revenue contributor, at 47.8% of total group revenue, and comprises the core postal and parcel delivery business of the group. This includes domestic post and parcels, international post and parcels, and products and services transacted at the post office.
Logistics is the next largest segment of SingPost, making up 30.5% of total revenue. Its services include freight forwarding and e-commerce logistics, warehousing, fulfillment, delivery, and other value-added services.
The USA business (14.2% of total revenue) consists of the businesses under TradeGlobal and Jagged Peak, which are both US-based e-commerce businesses. The group has announced its intention to sell off and exit this business, though. Property is SingPost’s smallest division by revenue, at 7.6%, and it includes the provision of commercial property rental as well as the self-storage business.
Operating profit breakdown
Now let’s look at which division makes the most money for the group. For that, I compiled the operating profit by division for Q1 2020 in the above table.
Post and parcel make up the bulk of total operating profit, at 90%. Property is the next best contributor at 30.9%, while both logistics and the USA business are loss-making. The post and parcel business has a strong moat as SingPost is the only postal service provider in Singapore, and investors can rely on it for consistent revenue and profit.
Investors should note that both e-commerce businesses (logistics and USA) are loss-making. Though the logistics division is the second-largest revenue contributor, it is, unfortunately, registering an operating loss. Property is a significant contributor to operating profit even though its revenue contribution is small, as rental business is considered stable and predictable.
Investors can now dig in further
With this basic knowledge of how SingPost makes its money, investors can start digging deeper into the group. Look to find out the history of revenue and operating profit contributions for each division over the last 5 to 10 years, and also the margins for each division and how they have evolved over the years. It’s also a good learning experience for investors to understand why SingPost intends to dispose of its USA business.