Digitalization Will Drive Persistent Margin Contraction and Revenue Pressure for Years to Come

Catalysts

About Singapore Post

Singapore Post operates as a postal and logistics service provider, delivering mail and parcel solutions across the region.

What are the underlying business or industry changes driving this perspective?

• While e-commerce continues to drive parcel delivery growth, the company faces ongoing contraction in letter mail volumes as digital communication accelerates. This is likely to weigh on revenue mix and margins over time.
• Although strategic investments in automation and expansion of the parcel sorting capacity could lower unit costs and enhance productivity, persistent manpower cost inflation may continue to pressure net margins in the medium term.
• Despite a strengthened balance sheet following asset divestments and debt reduction, the reduction in scale also means lost profit contribution from discontinued international operations. This leaves earnings recovery dependent on domestic execution.
• While collaborations and the expansion of the collection point network aim to improve customer reach and operational efficiency, the saturated domestic market and high competition limit the upside for organic revenue growth.
• Structural pressures such as digitalization and government initiatives pushing digital-first services are expected to keep shrinking traditional postal revenue. This challenges the sustainability of overall earnings outside of the logistics segment.

Assumptions

This narrative explores a more pessimistic perspective on Singapore Post compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Singapore Post's revenue will decrease by 19.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 32.3% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach SGD 13.7 million (and earnings per share of SGD 0.01) by about December 2028, down from SGD 239.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SGD17.9 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 87.1x on those 2028 earnings, up from 3.9x today. This future PE is greater than the current PE for the SG Logistics industry at 12.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If e-commerce parcel growth rebounds sharply due to regional demand or new partnerships, Singapore Post's revenue from logistics could stabilize or rise. This could result in future earnings improving rather than remaining flat.
• Ongoing investments in automation and network partnerships could unlock greater-than-expected cost efficiencies, which would widen net margins and support stronger earnings recovery.
• Repurposing the post office network or forming new agency and franchise partnerships might create new revenue streams. This could counteract the downward pressure from declining letter mail volumes on total company revenue.
• If government digital directives slow or find ways to maintain a hybrid approach, the decline in letter volumes may moderate. This could reduce pressure on top-line and operating profit.
• Singapore Post's solid balance sheet after divestments gives it significant financial flexibility. Opportunistic investments or acquisitions could drive profitability higher, positively impacting both revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Singapore Post is SGD0.43, which represents up to two standard deviations below the consensus price target of SGD0.55. This valuation is based on what can be assumed as the expectations of Singapore Post's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD0.66, and the most bearish reporting a price target of just SGD0.43.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be SGD390.8 million, earnings will come to SGD13.7 million, and it would be trading on a PE ratio of 87.1x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of SGD0.41, the analyst price target of SGD0.43 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.