The loss of a key earnings pillar introduces uncertainty over SingPost&rsquo s future strategy and earnings contribution, says the agency

 

GLOBAL ratings agency S& P said on Thursday (Dec 5) it has placed Singapore Post : S08 -0.84% (SingPost) on CreditWatch negative, following a change in its future strategy and the sale of its Australian business. 

 

On Monday, the national postal service provider said it has entered a share purchase agreement to divest its Australian business at an enterprise value of A$1 billion (S$870 million). This was part of the outcome of a strategic review, launched earlier this year, seeking to explore strategic options to enhance its business value and maximise shareholder value.

 

S& P believes that the sale will be &ldquo transformative&rdquo for SingPost and clouds its future strategy.

 

&ldquo Over the past four years, SingPost has invested into the logistics industry in Australia to mitigate the structural decline in the postal sector,&rdquo said the agency. SingPost&rsquo s Australian business is now a key contributor, accounting for 58 per cent of total revenue in the first half of FY2025.

 

The segment includes fourth-party logistics services, third-party logistics solutions such as transportation and distribution, and last mile courier delivery, as well as warehousing services. 

 

The loss of a key earnings pillar introduces uncertainty over SingPost&rsquo s future strategy and earnings contribution, said S& P. 

 

It also unwinds management efforts over the past four years to diversify the business, and &ldquo calls into question the consistency and execution of the company&rsquo s stated strategy&rdquo , said the agency.

 

With the sale of SingPost&rsquo s Australian business, S& P reckoned that its remaining business is likely to be narrower with significantly reduced scale and diversity.

 

Still, S& P noted that the transaction is expected to generate a net gain of S$312.1 million, with the company receiving cash proceeds of S$682.8 million. The proceeds can be used to pay down its outstanding Australian dollar-denominated debt of S$544.9 million. 

 

A portion of the remaining proceeds is likely to be earmarked for a special dividend, rather than used for further debt reduction, it said.

 

Based on the agency&rsquo s estimates, SingPost&rsquo s debt-to-Ebitda (Earnings before interest, taxes, depreciation and amortisation) ratio will reduce to below two times, following the completion of the sale. This will be a material improvement from S& P&rsquo s earlier projection of more than three times for FY2025 and FY2026, it said. 

 

Meanwhile, S& P said SingPost&rsquo s leverage policy and future capital allocation appear uncertain. 

 

&ldquo The improved leverage position may not be sustained through investment cycles,&rdquo it said. &ldquo This will depend on the company&rsquo s future business strategy, which could require further investment and time.&rdquo  

 

The company&rsquo s longer-term leverage tolerance also remains unclear, said S& P. 

 

It added that there remains uncertainty around the use of SingPost&rsquo s proceeds, even as the company continues to work on divesting other non-core assets. 

 

&ldquo A potential sale of SingPost Centre could provide significant financial flexibility to the company and could further reshape the business,&rdquo it said. &ldquo Should a sale occur, the way in which SingPost reallocates capital could have a bearing on both its business and financial risk profiles.&rdquo

 

 

Maybank Securities analyst Hussaini Saifee has maintained his &ldquo buy&rdquo call on Singapore Telecommunications Z74 (Singtel) while keeping his target price of $3.65. This follows Singapore Post S08 &rsquo s (SingPost) announced divestment of its Australia business,which could provide Singtel with special dividends &mdash adding to its capital return arsenal.

 

SingPost is Singtel&rsquo s 22% owned associate, Hussaini notes. Analyst Jarick Seet, which covers the stock, expects a special dividend of $360 million on this transaction, translating to $79 million as Singtel&rsquo s portion of special dividends. 

 

Seet further points out the potential divestment of other SingPost assets, which could lead to more special dividends in the medium long term. 

 

Hussaini highlights that Singtel has previously flagged $6 billion in potential capital recycling as part of its Singtel28 strategy. To this end, he sees two potential capital-recycling targets over the medium term &mdash the equalisation of its own stake in Bharti with the Mittal family and the divestment of its stake in Gulf Energy.

 

While these capital recycling targets could be executed in tranches over a medium term, Maybank believes that Singtel has already generated $2 billion in proceeds from capital recycling in 2024 to 2025 which in turn can help to support near term value realisation dividends, says Hussaini.

 

Hussaini estimates that Singtel will generate free cash flow (FCF) of $4.9 billion over FY2025 to FY2027, with past and expected capital recycling adding a $8 billion buffer. 

 

Assuming SingPost pursues these capital returns, Hussaini sees potential for another $300 million in special dividends. This yields a $13.2 billion cashflow and asset recycling buffer for dividends in FY2025 to FY2027. Singtel&rsquo s estimated dividends over FY2025 to FY2027 total $8.9 billion.  

 

According to Hussaini, &ldquo this suggests excess capital of $4.3 billion, which could be partly used for share buybacks, in our view.&rdquo

The group may consider a special dividend after repaying debt and considering future funding needs

 

SINGAPORE Post (SingPost : S08 +0.86%) has entered into a share purchase agreement to divest its Australian business at an enterprise value of A$1 billion (S$870 million) as part of the outcome of a strategic review. The review, launched earlier this year, sought to explore strategic options that would enhance business value and maximise shareholder value, it said.

 

SingPost will receive actual cash proceeds of A$775.9 million and generate a gain on disposal of about S$312.1 million, subject to adjustments determined at the time the deal is completed. 

 

The buyer is Pacific Equity Partners, an Australia-headquartered private equity fund, said the national postal service provider on Monday (Dec 2).

 

SingPost&rsquo s Australia segment includes fourth-party logistics services, third-party logistics solutions including transportation and distribution, and last-mile courier delivery, as well as warehousing services.

 

The net asset value of the company&rsquo s Australia segment stood at about S$384.7 million as at Sep 30, 2024. Revenue for the business rose 44.1 per cent on the year to S$574.8 million for the first half ended September. Operating profit increased 30.2 per cent on the year to S$30.4 million.

 

Apart from the Australia business, the international and Singapore businesses contributed S$12.7 million and S$23 million in operating profit, respectively.

 

Use of proceeds

SingPost said that proceeds from the proposed disposal will reinforce the group&rsquo s liquidity and strengthen its balance sheet. 

 

It intends to use some of the gross proceeds to repay its borrowings, particularly its Australian dollar-denominated debt amounting to A$362.1 million as at Sep 30, 2024. SingPost&rsquo s total Australian dollar-denominated debt stood at A$614.8 million as at end-September. 

 

Additionally, the group also said it would consider issuing a special dividend, after repaying its debt and considering its future funding needs. It will retain the rest of the proceeds for future growth opportunities to invest in existing and/or new businesses, assets and investment opportunities, said the group. 

 

Simon Israel, chairman of SingPost, said: &ldquo The board believes this divestment is the best option for shareholders by crystallising the unrealised value of the business and bringing forward unlocked value for shareholders.&rdquo  

 

What next?

Upon completion of the sale, SingPost will &ldquo review and reset&rdquo its strategic plan, with a &ldquo continued focus on shareholder value&rdquo , said group chief executive Vincent Phang.

 

Assuming that the deal was completed on Mar 31, 2024, the net tangible asset per SingPost share would increase to S$0.689 from S$0.349.

 

Earnings per share would have been S$0.162, up from S$0.035, if the transaction had been completed on Apr 1, 2023. 

 

SingPost will convene an extraordinary general meeting to obtain shareholders&rsquo approval for the transaction. It will also need to obtain the approval of Australia&rsquo s Foreign Investment Review Board for the deal to go through.

 

The divestment is expected to take place by the end of March 2025. Following the completion, SingPost Australia Investments and its subsidiaries, including Freight Management Holdings, will no longer be part of the SingPost group.

 

OCBC Global Markets Credit Research said in a report on Monday that the divestment is expected to be a &ldquo positive&rdquo credit event for SingPost because debt will be reduced substantially, and the Australian businesses are still facing considerable headwinds from softer business environments and stiff competition.

 

&ldquo Per management, SingPost is likely to return to net cash position after the transaction,&rdquo said the report.

 

SingPost&rsquo s freight-forwarding business Famous Holdings in Australia, which is not part of the proposed divestment, has been classified as a non-core asset and is available for asset recycling, noted OCBC.

 

&ldquo The outlook of the freight-forwarding industry remains challenging, with continued uncertainty stemming from the Middle East developments per annual report FY2024,&rdquo it added.

 

In a separate report, OCBC Investment Research noted that SingPost&rsquo s Australian logistics business is one of the top players Down Under and was contributing significantly to the group as it pivoted away from its domestic post and parcel business.

 

But the management could not tell the analysts at the briefing on Monday what the strategic plans are for the group, post-divestment. This is why the OCBC Investment Research analyst is not raising the fair-value estimate of SingPost shares at S$0.58.

 

SingPost did not respond to The Business Times&rsquo query on the possibility of a delisting following the divestment of its non-core assets and the Australian business.

 

CGS International has, however, raised its target price for the stock to S$0.74 from S$0.58, as it believes that SingPost will double-down on its asset monetisation strategy and return cash to shareholders.

 

There are S$1.5 billion worth of assets ripe for value-unlocking by SingPost over the next two years, CGS pointed out. These include SingPost Centre (valued at S$1.1 billion) and other post office assets, the freight-forwarding business (valued at more S$100 million), and minority-stake investments.

 

Maybank Securities analyst Jarick Seet had earlier said that he viewed the group as &ldquo deeply undervalued&rdquo , considering its current net assets, which could result in higher profitability and dividends if the group decides to sell them over the next few years.

 

He had added that the sale of the freight-forwarding business would &ldquo significantly reduce finance costs and bump up the future profitability&rdquo for the group.

 

A BT commentary last month had urged SingPost to divest non-core assets such as its post office properties to cut borrowings. In March, SingPost said that it would be looking to divest such assets, including retail-commercial mixed development SingPost Centre.

 

SingPost is making more headway in its quest to slash debt and reinvent itself. Last week, it said that it is in exclusive talks for a potential sale of its Australian business, though nothing definitive has been reached. 

 

The postal services provider has been focused on getting leaner in recent years, closing 12 post offices and identifying non-core businesses in a strategic review that concluded in March. As part of the weight-shedding, it plans to sell SingPost Centre at Paya Lebar Central, a non-core asset valued at S$1.1 billion as of September last year.

 

Also, the potential sale of its freight forwarder unit, Famous Holdings &ndash which SingPost has identified as a non-core asset &ndash could unlock about S$900 million to S$1.1 billion of proceeds, a Maybank Securities report said last week. The report, which initiated coverage on the stock with a &ldquo buy&rdquo rating and a S$0.74 target price, deemed SingPost &ldquo deeply undervalued&rdquo . SingPost&rsquo s counter closed at S$0.58 last Friday.

 

While the market celebrated the potential divestment of the Australian segment, there is some irony in this development. A sale Down Under will help SingPost pare its debt and interest expenses, but it was its expansion in the Australian market that had contributed to its growing loan obligations.  

 

At the same time, its acquisitions there were key to its pivot towards global logistics. Already, SingPost&rsquo s Australian interests account for 59 per cent of its operating profit in H1 FY2025, providing much of the growth in revenue. 

 

The market will now keenly watch which of its Australian units and how much of them it will sell. As BT&rsquo s Tay Peck Gek noted in a Hock Lock Siew piece last week, selling anything other than a minority stake in its Australian ventures will negate the work it has put into growing its business there.

 

Balance sheet aside, SingPost faces a larger and more fundamental existential conundrum. It is no longer a public utility provider, as its CEO Vincent Phang noted. However, it continues to have the trappings of one.

 

It is Singapore&rsquo s only public postal licensee and must incur costs to keep up service standards. It also needs the government&rsquo s approval to raise postage rates, which it did last October. Even so, the last major rate hike was in 2014.

 

Last year, BT&rsquo s Ben Paul had reckoned in a Mark to Market column that the boost from rate hikes would be a temporary one. &ldquo The higher postage rates will do nothing to halt the decline in postal volumes,&rdquo he&rsquo d said. From FY2019 to FY2023, SingPost&rsquo s mail volumes fell by more than 40 per cent. 

 

S& P Global Ratings, however, said in an update this year that the higher rates and improving e-commerce volume mean that the domestic postal sector is &ldquo no longer a drag&rdquo on SingPost. The credit ratings agency has a &ldquo BBB&rdquo rating and negative outlook on the company.

 

For SingPost&rsquo s latest half-year earnings period, revenue from Singapore was up thanks to the higher rates, but one-off costs and the continued decline in letter mail volume tugged the unit&rsquo s bottom line into a S$900,000 operating loss &ndash albeit a much smaller one compared with its previous loss of S$14.7 million.

 

The group is hammering out an operating model with the authorities to &ldquo ensure the long-term commercial viability of postal services&rdquo , it said earlier this month. For now, the focus appears to be on its post office network, with the number of branches set to be &ldquo significantly smaller&rdquo , chief executive Phang said at a recent analyst briefing.

 

It is a little soon to tell, but these moves hardly sound like the seismic changes that BT&rsquo s columnists have previously mooted, from letting SingPost revise its own rates annually to having a full or partial nationalisation of its domestic obligations. 

 

Regardless, SingPost&rsquo s inbox is pretty full it has given itself three years to reduce debt, scale up in a competitive Australian market and re-engineer its local postal network, among other things. 

 

The postman&rsquo s snow, rain and heat must be looking pretty good right now.