When Vincent Phang joined SingPost to take charge of its local business in 2019, he was well aware of the structural decline of domestic mail whose volume hit a peak a decade ago. Phang, who holds a post-graduate diploma in flight test engineering, figured there should be a &ldquo glide path&rdquo of seven or eight years, buying time for him to lead the company&rsquo s further doubling down on logistics.

 

Unfortunately, because of the pandemic, Phang is all hands on the yoke. The decline in postal volume has accelerated sharply and what was once the core business &mdash and cash cow &mdash of SingPost is now a loss-making unit. Phang, who took over as the group CEO in September 2021, now has a more pressing challenge on hand.

 

For its most recent FY2023 ended March 31, SingPost&rsquo s post and parcel segment suffered its first-ever full-year loss of $15.9 million, compared to a profit of $24.9 million for the year before, hit by a combination of higher costs even as volume declined at a quicker pace.

 

So unfeasible was the postal business that the government, which gave SingPost the monopoly rights to provide basic mail services &mdash specifically, access to all letterboxes &mdash has been asked to step in and review SingPost&rsquo s costs and operations, including hiking postage rates, to make this a more viable business to continue with.

 

Phang, citing the ongoing review, which is to be completed &ldquo well within&rdquo the current FY2024 ending March 2024, declined to share more details on what kind of adjustments will make sustainable commercial sense. He is clear, however, that the 165-year-old company he now leads is writing one of its more remarkable chapters. &ldquo It has been a very interesting time for SingPost,&rdquo says Phang in an interview with The Edge Singapore.

 

News of the strategic review, when first announced on May 11, briefly sent SingPost shares surging. Before that, the shares had dropped by 76.2% from their peak of $2.14 back in late January 2015. Year-to-date, the shares have fallen by 1.9%. SingPost shares closed at 51 cents on July 20, valuing the company at more than 80x historical earnings, and according to Bloomberg data, 23.2x forward earnings

 

Complementary logistics

 

For now, Phang will not be drawn into discussing the quantum of the postage hikes, other than that SingPost is running through scenarios with the government. He is clear, however, that doubling down further on the logistics business &mdash with plenty of complementary elements with post &mdash is something SingPost wants to do.

 

Logistics is not new to SingPost, but up till just before the pandemic, this business segment had been a &ldquo fledgling&rdquo one and not contributing meaningfully to the overall bottomline, says Phang.

 

The disruption caused by the pandemic meant SingPost had to bear with much higher operating costs for its domestic mail business. Unfortunately, it cannot just walk away as this responsibility of making last-mile delivery to the letterbox comes with the monopoly. &ldquo We&rsquo ve managed to serve the country, but that came at a great cost,&rdquo says Phang.

 

At the same time, the surge in e-commerce-related deliveries made it clear this had to be the &ldquo good balance&rdquo to offset the drop in mail, says Phang. Today, the logistics business is a major contributor to SingPost&rsquo s bottomline. Of the $1.9 billion in total revenue for FY2023 &mdash a record &mdash 70% came from logistics, versus just 38% back in FY2020. More importantly, logistics contributed 90% of the total operating profit. &ldquo I think the value of the pivot to logistics may not be as adequately recognised by the market,&rdquo says Phang. For FY2023, the company, as a whole, reported earnings of $24.7 million, down 70.3% y-o-y. It plans to pay a total FY2023 dividend of 0.58 cents. As recent as FY2016, it paid 6.5 cents per share.

 

It is easy to chart a new direction, but the tough work is in the actual implementation. Phang is careful to keep his feet grounded, literally. In an effort to better understand the nuts and bolts, as part of his grand ambition to be a regional or even global e-commerce supply chain player, Phang made some deliveries himself. &ldquo It takes six seconds to deliver to the letterbox but six minutes to the door,&rdquo he recalls.

 

The move to go big in logistics is already underway. Back in October 2020, SingPost took a 38% stake in Australia&rsquo s Freight Management Holdings (FMH) for $84.1 million. The stake was eventually raised to 51% just over a year later and to a further 88% this January.

 

Phang explains the acquisitions were done in incremental steps so that SingPost can better refine the strategies to be deployed and how this business in Australia should be run. When asked, he says it is a &ldquo matter of time&rdquo before SingPost fully acquires FMH.

 

A reason it has yet to do so is that he wants to be &ldquo very disciplined&rdquo and not be pressured into making acquisitions just for the sake of growth. Thus far, he is encouraged by how FMH has not only grown organically, but also made &ldquo disciplined, targeted&rdquo acquisitions of its own, such as CouriersPlease, a first- and last-mile delivery courier network. These two entities combined generated revenue of $815 million, or 44% of SingPost&rsquo s total.

 

Beyond the current overseas focus on Australia, Phang says North Asia, with China as a huge exporting market, is another region SingPost cannot ignore if it wants to be a regional e-commerce logistics service provider.

Alluding to SingPost&rsquo s Quantium Solutions unit, which has built up a &ldquo reasonable&rdquo Southeast Asian footprint, Phang says that is a foothold he already has in developing further capabilities, entrenching the company deeper in latching on the growth.

 

&lsquo Asset appropriate&rsquo businesses

 

Unlike under the previous management teams when SingPost made a quick series of acquisitions, Phang is adopting a more careful and deliberate stance. He prefers to make alliances and partnerships, and work on the &ldquo competitive advantages&rdquo that all parties may bring to the table.

 

One recent example is an MOU signed on July 4 with Sats to explore a potential joint venture to operate an e-commerce transshipment hub in Singapore. &ldquo If you put two businesses together and work on the competitive advantages that each business brings to the table, I think we can achieve a lot more scale growth and over a shorter period of time,&rdquo he reasons.

 

Phang agrees that some of the previous acquisitions made under his predecessors ended up as futile attempts to grow, even though the broader direction of moving into logistics is similar. &ldquo If they don&rsquo t work out, we will rationalise them,&rdquo he says, citing SingPost&rsquo s divestment of its loss-making US subsidiaries in April 2019.

 

&ldquo I believe it&rsquo s very important, given how logistics have moved so rapidly over the last few years, to really take stock of our own stables. We have to look at what we have, whether it&rsquo s still relevant to the strategy going forward,&rdquo he adds. &ldquo But among the acquisitions that we have made, those that we have at this moment are all profitable.&rdquo

 

Given the more pressing hand he is dealt with, it is not good enough for Phang if the various businesses are merely profitable running on their own. He wants to take it a step further by asking how SingPost can get the best returns out of them.

 

In other words, if the businesses cannot help SingPost become a regional or global e-commerce logistics supply chain player, they will be deemed &ldquo non-core&rdquo and sold off and the capital recycled. What guides the review is instead whether or not the businesses are &ldquo asset-appropriate&rdquo for itself, its customers and its alliance partners, says Phang.

 

On July 17, SingPost announced it has appointed Merrill Lynch (Singapore) or BofA Securities to undertake this review. &ldquo We want to create options for us, so that we can be disciplined about deploying capital in a way that achieves the greatest return for our shareholders,&rdquo says Phang. &ldquo Ultimately, what we want through the strategic review is to ensure that every underlying business that we have within the group is appropriately valued,&rdquo he adds.

 

Despite the challenges of the letterbox, SingPost is not about to abandon the post and parcel business just yet. Phang reiterates that he takes his obligations as the designated postal licensee &ldquo very seriously&rdquo , and is looking for ways to reconcile a future where e-commerce might be the defining user experience for the group with the relevance of the postal-infrastructure postal system.

 

When pressed again for more details on the postage hikes &mdash the basic rate for local delivery starts at 31 cents &mdash Phang explains that this move is &ldquo essential and critical, but it needs to be accompanied by more radical, more fundamental structural changes&rdquo &mdash a process that has now involved the government.

 

For example, issues to be addressed include whether SingPost can reduce the number of post offices, and to &ldquo recalibrate and review structurally the entire system&rdquo it now runs. &ldquo It sounds like a lot of big words, but there are tangible workflows behind it and we are looking at every individual element,&rdquo says Phang.

 

He adds: &ldquo We are focused on making the postal service relevant. We are focused on making the postal service sustainable by working in tandem with the developing trends in e-commerce deliveries. We are looking at the infrastructure being the element of delivery going forward, that helps to not just provide the customer experience but mitigate the cost increases as well.&rdquo

SINGAPORE - Singapore Post (SingPost) aims to complete a strategic review of the group&rsquo s business lines by March 2024 and has retained BofA Securities as its exclusive financial adviser to oversee the process.

 

In response to queries from The Straits Times, a SingPost spokesman said on Tuesday that the company intends to complete the strategic review within the current financial year ending March 31, 2024.

 

SingPost revealed that it is embarking on a strategic review of its operations when it announced its results for the previous financial year in May.

 

At that time, the group&rsquo s post and parcel unit had reported its first-ever annual loss in the financial year ending March 31.

 

There had been a sharp drop in domestic letter volumes since the Covid-19 pandemic, and the downward trend was expected to continue well into the future, SingPost said.

 

On the flip side, the group&rsquo s Australian and international divisions had grown significantly to account for 86 per cent of SingPost&rsquo s overall revenue.

 

This shift in the revenue mix prompted SingPost&rsquo s management to review its business segments to see if they still fit into the group&rsquo s goal of becoming a global logistics player, and not just a Singapore-only postal services company.

 

News of the re-evaluation had resulted in some speculation over the future of SingPost&rsquo s ailing mail delivery business in the wake of the review.

 

On July 5, however, the government said it would consider allowing SingPost to raise postage rates to &ldquo better reflect the cost of the letter mail business&rdquo .

 

The group said subsequently that it would work with the Infocomm Media Development Authority to review its costs and operating model, as well as work &ldquo towards a framework for long-term sustainability and commercial viability of the domestic postal service&rdquo .

 

Since then, SingPost shares have climbed almost 7.7 per cent to close at 49 cents on Tuesday, their highest levels in nearly eight weeks.

 

Meanwhile, the national postal service provider said in a statement on Monday that the review would focus on transitioning the group into a logistics business in due course.

 

As part of this process, it would identify potential businesses or assets that are non-core or those that are not expected to earn a return above their cost of capital.

 

This could lead to possible divestments and capital would be recycled to support further investments in the logistics operations, the group said.

 

The review would also look at how the group could optimise its balance sheet, enhance shareholder returns, and ensure that the group&rsquo s structure would allow its underlying businesses to be &ldquo appropriately valued&rdquo .

 

SINGAPORE Post : S08 +2.08% (SingPost) announced on Monday (Jul 17) that it has appointed BofA Securities as its exclusive financial adviser for its strategic review.

 

On May 11, SingPost said it was evaluating the commercial sustainability of its domestic postal business as part of a strategic review of its portfolio. This came after the group posted a 28 per cent drop in earnings for the second half ended March 2023.

 

In its latest statement, the national postal service provider said the review will focus on transitioning the group to a logistics business over time. It will identify potential businesses or assets which are &ldquo non-core or which are not expected to earn a return above their cost of capital&rdquo .

 

&ldquo This could lead to possible divestments and capital recycling to support further investments in logistics,&rdquo the group said.

 

The review will also look at how the group can optimise its balance sheet and ensure the structure of the group allows its underlying businesses to be &ldquo appropriately valued&rdquo , while creating &ldquo optionality&rdquo for the future of these businesses.

 

&ldquo There is no assurance that SingPost will implement any of the options identified through the strategic review,&rdquo the group added.

 

On Jul 5, the government said it will consider allowing SingPost to introduce postage rate adjustments to &ldquo better reflect the cost of letter mail business&rdquo following a sharp decline in domestic letter volumes since the Covid-19 pandemic.

 

SingPost&rsquo s shares surged to a seven-week high the next day, and the group later announced it would work with the Infocomm Media Development Authority (IMDA) to review its costs and operating model.

 

It also said it intends to work with IMDA &ldquo towards a framework for long-term sustainability and commercial viability of the domestic postal service&rdquo .

 

SingPost chairman Simon Israel expects the decline in the group&rsquo s postal business to continue in the 2023/2024 fiscal year, he said in a message to shareholders in the company&rsquo s annual report released in June. He noted that the postal segment decline was a &ldquo structural issue&rdquo requiring a &ldquo structural solution&rdquo .

 

The company had highlighted the need for transformation years ago as its postal business faced disruption from digital substitution, further accelerated by the Covid-19 pandemic.

 

UOB Kay Hian is keeping its &ldquo hold&rdquo recommendation on Singapore Post (SingPost) S08 0.00% with an unchanged target price of 46 cents.

 

This comes on the back of a recent parliamentary hearing in early-July, whereby the Minister of State and Communications mentioned that the government would consider allowing SingPost to introduce postage rate adjustments in response to declining domestic letter & mail volumes.

 

Excluding a small 1%-3% increase in January this year, postage rates have been kept constant since 2014. This announcement was made after the group initiated a strategic review of its domestic postal business amid a global secular decline in traditional letter & mail volumes coupled with its post and parcel segment posting its first ever annual operating loss of $15.9 million in FY2023 ended March.

 

&ldquo As discussions are still ongoing between Singapore&rsquo s postal regulator Infocomm Media Development Authority (IMDA) and SingPost, we opine that the postal rate adjustments would likely occur in 3QFY2024/4QFY2024,&rdquo says analyst Llelleythan Tan in his July 11 report.

 

Tan adds that this cooperation between IMDA and SPOST was in line with his earlier expectations as he opined that the recent 1%-3% postal rate increase in January was insufficient to cover elevated operating costs, driven by inflation.

 

&ldquo With expected postal rate adjustments, we now reckon that the domestic postal & parcel (DPP) segment is nearing a bottom. Based on our FY2024 estimates, assuming constant delivery volumes, we estimate that SingPost would have to raise basic and tracked postal rates by 1-2 cents (3-5%) and 5-6 cents (2-3%) respectively to break even,&rdquo says Tan, who also views that the additional revenue from the hikes would likely flow down to the bottom line, given no incremental increase in operating costs.

 

The analyst estimates a $12-15 million operating loss for DPP in FY2024.

 

Meanwhile, the proposed postal rate adjustments follow a global industry trend whereby national postal carriers have done multiple basic postal rate hikes to combat declining volumes. Some examples include the UK&rsquo s Royal Mail (about 30% increase in two years), the United States Postal Service (about 32% increase since 2019, 10% increase in the last six months) and the NZ Post (about 30% increase in 2023).

 

Although postal rate hikes may bring in additional revenue assuming constant volumes, this may instead hasten mailing volume decline as mail users cut down on mailing costs. As postal rates are regulated by the government, Tan reckons that the group may not be able to increase basic postal rates instantly by about 30% in line with global peers but instead implement gradual 5%-8% rate increases, balancing commercial sustainability of the group while fulfilling its national obligations of providing essential domestic postal services.

 

&ldquo Assuming postal rate adjustments are insufficient, we expect changes to service standards as the next step to reduce operating costs,&rdquo says Tan, who also believes that SingPost may consolidate its postal branches and multiple sorting centres in the near-medium term to achieve greater economies of scale and lower overhead costs amid inflationary cost push.

 

Also, assuming relaxation of service standards and regulatory approval, Tan opines that the group may outsource the delivery of letter & mail to third-party logistical companies while it solely operates the sorting segment, leading to better margins for the DPP segment.

 

If all else fails, a nationalisation of SingPost&rsquo s letter & mail business is possible to ensure continued postal services in Singapore.

 

&ldquo In our view, in such a case, SingPost may spin off the letter & mail business into a public governmental entity while the government would likely contract SingPost to operate the business via a cost-plus model, due to the complexity of operating a global postal company and lack of suitable alternatives,&rdquo says Tan.

 

However, given that the Singapore government only fully liberalised the postal market in 2007, a nationalisation of SingPost&rsquo s letter & mail would likely be a last resort without first exhausting all available options as mentioned above, making it a long and drawn-out process.

 

Furthermore, SingPost utilises the same postal network for its domestic ecommerce segment, a segment that it believes in long-term, making it unlikely that the group would divest its letter & mail postal business and infrastructure.