Investment Assignment - Singpost PDF

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Singapore Post Pte Ltd

Table of Contents 1. Executive Summary .................................................................................................................................. 4 2. History and Financial Performance (SingPost) ..................................................................................... 4-8 2.1 Background ......................................................................................................................................... 4 2.2 Recent Financial Performance ............................................................................................................ 5 2.3 Revenue Composition ......................................................................................................................... 5 2.4 Shares Performance ............................................................................................................................ 6 2.5 Overtime Financial Performance ..................................................................................................... 7-8 3. Competitors Background, Financial & Shares Performance ................................................................... 8 3.1 FedEx ................................................................................................................................................ 8-9 3.2 Deutsche Post DHL Group .............................................................................................................. 9-10 4. Industry Analysis ........................................................................................................................................ 4.1 SWOT Analysis................................................................................................................................... 11 i. Strength ........................................................................................................................................... 11 ii. Weakness ................................................................................................................................... 11-12 iii. Opportunity .................................................................................................................................... 12 iv. Threat ............................................................................................................................................. 13

4.2 Porter’s Five Forces ...................................................................................................................... 13 i. Rivalry among Existing Competitors ................................................................................................ 13

ii. Threat of New Entry ................................................................................................................... 14 iii. Threat of Substitution ............................................................................................................... 14 iv. Bargaining Power of Suppliers ................................................................................................ 14 v. Bargaining Power of Buyers ..................................................................................................... 14 5. Industry Trend ................................................................................................................................... 15-17

5.1 Microeconomic Factors ................................................................................................................ 15 5.2 Macroeconomic Factors .......................................................................................................... 16-17 6. Computation of Financial Ratios ............................................................................................................ 17 6.1 Compare dividend yield, leverage debt, employees across 3 companies ......................................... 17

6.2 Management Effectiveness .......................................................................................................... 18 6.3 Profitability Ratio ......................................................................................................................... 18 6.4 Internal Liquidity Ratio ................................................................................................................ 18 Page 1 of 60

Singapore Post Pte Ltd

6.5 Financial Strength ......................................................................................................................... 19 7. Return on Equity (ROE) Approach ......................................................................................................... 19 7.1 Net Profit Margin .............................................................................................................................. 20 7.2 Total Asset Turnover ......................................................................................................................... 21 7.3 Financial Leverage ............................................................................................................................. 22 7.4 Return on Equity .......................................................................................................................... 22-23 8. Company Valuation ................................................................................................................................ 23

Capital Asset Pricing Model (CAPM) .............................................................................................. 23 8.1 Beta ....................................................................................................................................... 23-25 i. Selecting the Market Portfolio ................................................................................................... 23 ii. Obtaining the Characteristic Line.............................................................................................. 24 iii. Adjustment to Historical Beta ............................................................................................. 24-25 8.2 Risk-Free Rate .................................................................................................................... 25-26 Adjusted Risk-Free Rate ................................................................................................................ 26 8.3Market Risk Premium ....................................................................................................... 26-27 Geometric Mean ............................................................................................................................... 27 9. Valuation Models .......................................................................................................................... 27-34 9.1Dividend Discounted Model (DDM) .....................................................................................27-29 i. Dividend Growth .................................................................................................................... 27-28 ii. Sensitivity Analysis .............................................................................................................. 28-29 9.2 Free Cash Flow to Equity Model (FCFE) ............................................................................ 29-31 Sensitivity Analysis ........................................................................................................................ 31 9.3 Price to Earnings Ratio (P/E) ................................................................................................. 31-33 Sensitivity Analysis ........................................................................................................................ 33 9.4 Price to Book Value Ratio ...................................................................................................... 33-34 Sensitivity Analysis ........................................................................................................................ 34 10. Overall Evaluation ........................................................................................................................... 35-38 10.1 Intrinsic Value and Market Price ................................................................................................ 35-36 10.2 Difference Intrinsic Values ........................................................................................................ 36-37 10.3 Most Appropriate Model .........................................................................................................37-38 11. Conclusion ............................................................................................................................................ 38 12. References ....................................................................................................................................... 39-42

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Singapore Post Pte Ltd 13. Appendix.......................................................................................................................................... 42-60

1. Executive Summary The objective of this report is to analyses Singapore Post Limited’s current position and prospects, incorporating the use of various valuation techniques - Microeconomic, Macroeconomic and DuPont Return on Equity (ROE) to arrive at estimates of the intrinsic value of the company’s shares. This report will also include a comparison between the postal service providers competitors - FedEx and Deutsche Post DHL Group.

2. History and Financial Performance 2.1 Background

Singapore Post Limited (SingPost) was incorporated in 1918 and for over 160 years they have been delivering trusted and reliable services to homes and businesses in Singapore. Currently, SingPost is one of the leading eCommerce logistics in Singapore and 19 other countries around the world. As a logistics provider, SingPost covers services such as domestic and international delivery, warehousing, fulfilment and distribution.

SingPost was listed on the Main Board of the SGX-ST on 13 May 2003 and it is the only postal company in the world to have won the Express Mail Service (EMS) Cooperative Certification Gold Level Award by the Universal Postal Union for its Speedpost Worldwide Courier Service for 10 consecutive years since 2001.

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Singapore Post Pte Ltd

2.2 Recent Financial Performance As of the AY 2019/2020, SingPost is worth S$1,313.8 Million in revenue and earning a net profit of S$91.1 Million. As shown in Figure 1, both Revenue and Operating profit of SingPost has a slight decrease from AY 2018/2019 to AY 2019/1020. Despite having a decline in revenue and profit, SingPost had an tremendous increase in their Net Profit in AY

2019/2020

(91.1million)

from

AY

2018/2019 (19 million). This reflects that in general, SingPost are managing its expenses better to have an increase in net profit despite a

Figure 1 Financial Performance

decrease in revenue.

2.3 SingPost Revenue Composition (2019)

As per Figure 2, Post & Parcel and Logistic contributed to most of SingPost revenue in 2019, amounting to 55% and 36% of overall revenue respectively. SingPost’s Post & Parcel provides a wide range of delivery services and they constantly strive towards Figure 2 Revenue Composition

technological innovations to cater to the changing needs of the communities they serve. However, Postal being their main segment has been experiencing rapid decline in letter mail volumes in the last two quarters, which might be due to the increasing expectation from consumers. All 3 revenue compositions of SingPost had experienced a decline in revenue in 2019. Page 4 of 60

Singapore Post Pte Ltd

Figure 3 Operating Revenue

2.4 Shares Performance

Figure 4 SingPost stock price

Figure 5 Market stock price

According to Figure 4, there is a gradual downwards trend since 2018 and sudden drop in 2020. The highest stock price between 2018 - 2020 was 1.4400 on 08 February 2018 and the lowest stock price was 0.5800 on 23 March 2020. The main reason for the sudden drop in stock price was due to the outbreak of Covid-19 which affected the economy around the whole world. The current stock price for SingPost (0.650) is considered low as compared to the market current average price (0.89).

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Singapore Post Pte Ltd

2.5 Financial Performance (SGD)

Figure 6 SingPost Financial Performance

Using the data collected between FY2015 and FY2019 as per Figure 6, we will evaluate SingPost financial performance. We observed that the greatest changes in their performance is within FY2016 to FY2018 whereby in FY2017 they obtained the highest in revenue.

FY2016 - FY2017: On the 1st November 2016, Singapore Post Limited (“SingPost”) announced the launch of its Regional eCommerce Logistics Hub (“eComm Log Hub”) (SingPost.com, 2016). SingPost’s revenue in FY2017 increased 9.33% to S$1,513.4 million as compared to FY2016 due to the inclusion of SingPost’s eCommerce subsidiaries. In May 2017, SingPost mentioned that the eCommerce business is their key to their end-to-end eCommerce logistics growth strategy and had drove a 171.4% rise in eCommerce revenue to S$267.1 million. Hence in FY2017, SingPost experienced the greatest increase in revenue. FY2017 - FY2018: SingPost faced microeconomic challenges such as competition from the express courier services DHL. Although SingPost also provides overseas courier service, consumers still prefer DHL direct courier without external parties involved. Being a local service provided, SingPost requires

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Singapore Post Pte Ltd

external parties such as USPS to courier parcels overseas and customers would not want the hassle of following up their parcel from other external parties. Hence decrease in sale.

FY2019 - Current: The Straits Times, 2020, reported that SingPost experienced an unprecedented 40% surge in ecommerce deliveries during Covid-19. As mentioned above, 3 of SingPost’s main revenue segments are experiencing rapid decline in revenue since 2019. The virus outbreak had caused many countries restrictions and lockdowns which reduced the business for couriers. Many large organisation had adapted to the current situation by implementing technology to replace the need of courier. However, ecommerce is widely used after the first 3months of Covid-19 and consumers start to adopt ecommerce purchasing platforms due to its convenience. Therefore, the ecommerce business will recover soon in last than a year.

3. Competitors Overview 3.1 FedEx Background FedEx was founded as Federal Express Corporation was incorporated in 1971. They have been in the courier services for about 5 decades since they had first started. They only started to gain profits in 1975, when they became the marketplace’s premier carrier of high priority goods and the standard setter for the industry including having international acquisitions such as Asia in 1984. Financial Performance

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Singapore Post Pte Ltd

We have evaluated FedEx’s financial performance using the data collected from FY2015 to FY2019 as per Figure 7. FedEx has been quite stable in the financial performance from FY2015 to FY2019 while continuously increases its revenue. However, in FY2019, the net profit has a huge decline despite their high amount of revenue. Figure 7 FedEx Financial Performance

Shares Performance

Figure 8 FedEx Stock Price

The stock price of FedEx had gradually decrease since 2015 and experienced sudden drops in the third quarter of 2018 and early 2020. Covid-19 had greatly impacted FedEx whereby the stock price started to decrease rapidly from January 2020. However, FedEx’s stock price had recovered well, continuously increasing up to USD253.85 (SGD346.46) per share and are close to hitting their highest stock price of SGD274.32 on 19 January 2018.

3.2 Deutsche Post (DHL) Page 8 of 60

Singapore Post Pte Ltd

Background Deutsche Post AG was founded in 1969 in San Francisco, California, United States as the first international door-to-door express delivery service in the world. In 1998, Deutsche Post AG started to acquire DHL, a German-based logistics company which provides services like courier, parcel, and express mail service. By 2002, DHL was fully acquired by Deutsche Post AG into its Express division. Currently, DHL Express shares its DHL brand with business units such as DHL Global Forwarding and DHL Supply Chain.

Financial Performance

We evaluated DHL’s financial performance using the data collected from FY2015 to FY2019 as per Figure 11. DHL has been very stable from FY2015 to FY2019 despite the minor drop in revenue in FY2016. DHL managed to maintain and improve their performance with a gradual increase in revenue yearly and achieve a high revenue (SGD96,686 millions) and operating profits (SGD6,301 millions) in FY2019. Shares Performance

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Figure 9 DHL Financial Performance

Singapore Post Pte Ltd

Figure 10 DHL Stock Price

As compared to SingPost and FedEx stock price, all 3 companies encounter a drastic drop in stock price between January 2020 and March 2020 where Covid-19 affects the boundaries of the export and import trading. Despite the sudden outbreak, DHL recovered faster than the other 2 competitors, they successfully raised their stock price up to EUR38.5400 in August 2020, higher than their average of EUR29.9787.

4. Industry Analysis 4.1 SWOT Analysis Strengths

1. Branding SingPost has been established for more than 100 years. They have been providing different postal services such as mail and postage services locally and internationally. With such a long history and strong branding, customers would entrust the services provided by SingPost.

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Singapore Post Pte Ltd

2. Reliable SingPost has been reliable for its speedpost worldwide courier services for the 10th consecutive years, where trust was gained over the years for their exceptional services for public and postage services. They provided online links and applications to track delivery order in a hasslefree way by issuing delivery tracking numbers. As per Figure 13, SingPost represented Singapore and ranked 7th

Figure 11 World Ranking

among the top 10 postal services worldwide

Weakness

1. Expensive SingPost is one of the most expensive postage services in the world. As per Figure 14, SingPost has the highest price as compared to its competitors FedEx and DHL. Singaporeans that are more price sensitive will tend to choose cheaper courier service as compared to choosing one that is fast or provides better service. Figure 12 Price

2. Reliance on staff for delivery As delivering can be one of the biggest concerns for logistics companies. SingPost must entrusted staff on proper and prompt delivery of mails and postages locally and worldwide. SingPost has to ensure that staff follow the code of conduct given by the company such that delivery are on time and staff are not being overloaded with parcels to ensure prompt delivery for mails and returned letters and not end up being thrown away as it will affect the reputation of the company.

Opportunities Page 11 of 60

Singapore Post Pte Ltd

1. Pandemics Currently, due to pandemics, businesses for logistics

companies

have

increased

tremendously. As people are afraid to go out, consumers rely mainly on postages and mail to get items online to minimize risk of infections. A...