Recently, SingPost announced that its Q2 net profit attributed to shareholders rose by 10.3% compared to the previous year. However, after stripping out the effects of exceptional items, the underlying net profit dropped by 4.6%. This is because of a decline in domestic mail, which could not be offset by the increase in e-Commerce deliveries. Furthermore, due to incidents of service lapses in late 2018 and early 2019, SingPost had to beef up the no. of postmen and their remuneration, which led to an increase in manpower costs.
At the same time, SingPost also announced changes to its postage services with effect from 2 Dec 2019. Some of the key changes include:
- Segregating packages from mail and introducing new postage rates for package deliveries;
- Increasing postage rates and registered article service rates for letters and packages sent overseas via air; and
- Stopping doorstep deliveries.
Let us look at what are the likely impact from the above changes.
New Postage Rates for Package Deliveries
Currently, packages have the same postage rates as normal mail. With effect from 2 Dec 2019, packages will be segregated from normal mail (i.e. letters, postcards and printed papers weighing up to 500g) and have their own postage rates. For packages that do not require tracking, the current and future postage rates are as follow:
For the largest (i.e. non-standard) packages, the postage rate will increase between $0.00 and $0.30. This translates to an increase of 0% to 50%, with a higher percentage increase for lighter packages.
For packages that require tracking, the current and future postage rates are as follow:
Currently, tracking service for packages is provided via the registered article service, which costs $2.24 on top of the regular postage. Come 2 Dec 2019, registered article service will no longer apply to packages. Packages that need to be tracked will incur the postage rates under the new Tracked Package category. Compared to the current rates, tracked packages will cost more for lighter packages weighing up to 100g, and cost less for heavier packages weighing beyond 100g. The percentage change ranges from 7% to 60% for lighter packages and from -8% to -24% for heavier packages.
On the surface, it appears that the postage increase for lighter and heavier packages might offset each other. However, I believe there will be more lighter packages than heavier ones and the net effect is an increase in revenue for packages. SingPost should be smart enough to tweak its rates such that there is a net positive increase, notwithstanding the fact that as the Public Postal Licensee, any increase in postage rates have to be approved by the regulator.
Thus, the new postage rates for packages should be positive for SingPost.
Higher Postage Rates for Mail Sent Overseas Via Air
There will also be increases in postage rates for letters and packages sent overseas via air. The changes are as follow:
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Although there will be increases in postage rates, I would not place too much emphasis on this category of mail. For overseas postage, SingPost has to pay the postal service in the destination country to complete the last-mile delivery. The fees are known as terminal dues. Terminal dues are set by the Universal Postal Union and have been on the increase. The increase in overseas postage rates will help to offset the increase in terminal dues payable to overseas postal services.
Stopping Doorstep Deliveries
Besides the increase in postage rates, SingPost will also be stopping doorstep deliveries. Previously, postmen will make a doorstep delivery if the package is too large for the letterbox, or if the letterbox is full. From 2 Dec 2019 onwards, mails and packages will only be delivered to the letterbox. For packages that are too large, or if the letterbox is full, the recipient will have to collect them from the nearby post office. This move will improve the efficiency of postmen, as they no longer have to make detours to the doorsteps to make deliveries.
This is an important change for SingPost, as it was fined early this year for service lapses due to increasing workloads for the postmen. To correct for the service lapses, SingPost had to employ more postmen, extend delivery hours and increase their remuneration. They also reduced the volume of advertising mail, which are more lucrative than normal mail. In the latest financial results for 2Q 2019, labour and related expenses increased by 5.2% year-on-year, outpacing the 2.0% increase in revenue. By stopping doorstep deliveries and improving the efficiency of postmen, SingPost could eventually cut back on the no. of postmen and over-time, and increase the volume of advertising mail.
Although SingPost has been reporting declining underlying net profits, part of the reasons is due to temporary measures to address lapses in service standards. Once the service standards have stabilised, the temporary measures could be scaled back, leading to higher revenue and/or lower costs. The recent measure of stopping doorstep deliveries is a right step towards this direction.
Also, the segregating of packages from mail is effectively an increase in postage rates for packages. We should see better revenue from SingPost come Christmas.
Having said the above, it should be noted that any increase in revenue from the above changes is a one-time jump. Mail volumes are still declining, as businesses continue to switch from mail to digital communications. Although package volumes are increasing, they do not have the same margins as mail. Thus, after the anticipated one-time jump in revenue, we will continue to see declining overall margins as mail volumes continue to decline.
P.S. I am vested in SingPost.