Can Singapore Post Limited Continue To Grow Its Business?

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Singapore Post Limited (SGX: S08) recorded revenue growth of over 22% in the second quarter of its fiscal year ending 31 March 2017 (FY2016/17). This is summarised in the graph below:

Source: Singapore Post earnings presentation

But when we dig a little deeper, we begin to see a different picture.

eCommerce sales accounted for almost all of the growth in the second quarter of FY2016/17. And, much of the growth there was due to Singapore Post’s acquisitions of TradeGlobal and Jagged Peak. Meanwhile, the company’s other segments – Logistics and Postal – showed little or no growth.

Furthermore, there is competitive pressure at the Logistics segments. Sam Ang, chief executive for Quantium Solutions and Famous Holdings, shared his thoughts on the competitive landscape during Singapore Post’s recent second quarter earnings briefing (Quantium Solutions and Famous Holdings are subsidiaries of Singapore Post):

“When we mention about the competition in eCommerce Logistics, as you know there is a lot of upcoming players in the market; there are now the local players too, they are now bleeding very hard for market share and as such the pricings are very, very competitive which is a challenge to us in many aspects of it.

And obviously when you have a market that the competition is very keen just to get market share, it will always erode your margin.”

While sales at Singapore Post grew during the recent second quarter, underlying operating profit did not. In fact, all segments experienced sizable drops in underlying operating profit. This is summarised in the graph below:

Source: Singapore Post’s earnings presentation

Ang believes that Singapore Post can be competitive in the end-to-end logistics delivery market. But he also added that competition is not likely to abate anytime soon. In fact, it might become even more intense as the year draws to a close. Ang said:

“… the problem is that when the eCommerce space is becoming a hotter piece now, has more visibility now, like everything else everybody wants to jump into the game to have a bite of it, and I think – especially so over the last three, four months I think the competition is very intense because we are coming close to the year end and people expect the volumes to pick up, and that’s where the competition is intense.”

To be sure, there are a more than a few moving parts to consider here. Singapore Post’s traditional postal services remains under pressure and at the same time, the company is temporarily without the rental income associated with SPC Mall, which is undergoing redevelopment. Elsewhere, eCommerce profits are hit by high seasonal labour costs.

So, will Singapore Post be able to build a sustainable advantage in the future? Investors will have to continue watching developments in the company and how its financials perform over the next few years.