Singapore Post May Shut U.S. E-Commerce Unit, Analysts Say

(Bloomberg) -- Singapore Post Ltd. is likely to wind down or sell its loss-making U.S. e-commerce business after conducting a strategic review of the unit, according to a Bloomberg survey.

A potential divestment or shuttering of the business will bode well for SingPost’s long-term profitability, according to four analysts covering the stock. Two brokers including CLSA Ltd. have factored in benefits from a possible transaction in their earnings estimates.

The poll was conducted after SingPost said last month it saw an impairment risk to the book value of its U.S. unit. The company is now conducting a review of the business which is “expected to remain loss-making in the current financial year," Mei Yu Hong, a company spokeswoman told Bloomberg by email on Feb. 20.

“I am expecting an exit from U.S. e-commerce business either by scaling down or a sell-off," said CLSA analyst Horng Han Low, who upgraded the stock to buy from sell on Feb. 7 with a target price of S$1.17. “Sentiment has been overwhelmed due to the loss-making online business even as management reversed the structural decline in Post and Parcel segment," he said by phone.

The U.S. e-commerce business, which helps U.S. retailers including Speedo and Tommy Hilfiger manage online stores and package deliveries, has been a drag on SingPost’s profit as the unit suffered losses in each of the last three years, a key reason why SingPost’s market value has more than halved since a record high in February 2015.

SingPost, which counts Temasek Holdings Pte. and Alibaba Group Holding Ltd. as its two biggest shareholders, bought majority stakes in U.S. e-commerce companies TradeGlobal Holdings Inc. and Jagged Peak for about $184 million in 2015.

“The e-commerce operating environment in the U.S. continues to be challenging due to intensifying competition and rising customer bankruptcies," SingPost’s Hong said. Impairments, if any, will be assessed based on full financial year results and future plans, she said.

CLSA’s Low said a potential impairment should be seen as a prelude to the exit from U.S. e-commerce. Operating losses in the e-commerce unit widened to S$13.3 million in the third quarter, compared to a S$11.7 million loss a year ago, according to the company’s filing.

Old Is Gold

Sticking to traditional businesses might work out better for SingPost as its mail unit has contributed the most to its annual operating income since 2010, according to Bloomberg data. The “U.S. e-commerce strategy comes at a heavy price and would be costly to execute a turnaround. It has weighed on valuations and business outlook,” CLSA’s Low said.

The company is expected to report full-year earnings results in about two months. SingPost’s 12-month forward price to earnings ratio has fallen to 20.8 from 21.9 at the start of 2018.

The end of the U.S. unit is unlikely to have an "impact on the bread-and-butter" mail and package business, CGS-CIMB Securities SP Pte. analyst Ngoh Yi Sin said by email. "Singapore Post will have to continue to manage its service quality for domestic mail, and overall margin for post and parcel business, while looking for new growth engines."

There is a 50 percent chance that SingPost will end the U.S. e-commerce business but an exit should provide an "immediate boost to its earnings," Ngoh said.

To contact the reporter on this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Teo Chian Wei

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