Why SingPost's profitability could weaken over the next 1-2 years

EBITDA margin to slump 30-33%.

According to Standard & Poor's credit analyst Wee Khim Loy, SingPost's profitability is likely to weaken due to the company's increasing focus on the logistics business and the decline in its domestic mail business.

The logistics business is more competitive and has lower margins than the mail business.

"We expect SingPost's EBITDA margin to weaken to about 30%-33% in the next 12-18 months from 37% in the fiscal year ended March 31, 2012. We estimate that the company's logistics, retail, and e-commerce businesses will contribute 43%-45% of annual revenue in the next 12-18 months, compared with 42% in fiscal 2012," Wee Khim Loy said.

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In our base-case scenario, we expect SingPost to continue to focus on managing costs, which should partially offset the likely margin contraction.

We also expect SingPost's ratio of funds from operations (FFO) to adjusted debt to be at 50%-53% as of March 31, 2014, compared with 55% as of March 31, 2012. We adjusted debt with surplus cash. The projected ratio is within our range for a "modest" financial risk profile. The company's strong liquidity and excellent access to capital market also underpin its financial risk profile.

"We expect SingPost's revenue to grow 10%-13% to about S$650 million for fiscal 2013," said Ms. Loy. "Higher costs--particularly of labor, which forms a significant 40% of SingPost operating expenses--are likely to temper growth in operating profit."

The negative outlook reflects our expectation that SingPost's profitability and business risk profile could weaken over the next one to two years. The outlook also reflects uncertainty about the impact of the company's recent mergers and acquisitions on its credit profile. Any acquisition that entails further debt-raising could negatively affect our rating on SingPost.