SINGAPORE – Global ratings agency S&P gave a thumbs down to Singapore Post’s proposed acquisition of Australian courier and logistics services provider Border Express, citing its impact on the company’s gearing.
“The transaction adds incremental ratings pressure given our negative outlook on the ‘BBB’ long-term issuer credit rating as SingPost navigates a structural decline in the postal services business,” S&P Global Ratings said in a report on Friday.
“The deal also heightens integration and execution risk during a phase of business transformation.”
SingPost announced last week a deal to acquire Border Express for not more than A$210 million (S$184 million), through its Australian subsidiary Freight Management Holdings (FMH).
The postal service provider said the acquisition would augment and widen FMH’s integrated logistics network across Australia, where Border Express’ network spans 16 facilities, a fleet of more than 700 vehicles and 1,300 employees. SingPost said the deal would also enhance FMH’s service offerings while increasing its scale and market share, thus strengthening the company’s market position in Australia.
S&P acknowledged that if successfully integrated, the acquisition could improve the profitability and operating efficiency of SingPost’s logistics business in Australia.
“Earnings accretion from BEX Group (Border Express) will add incremental scale to SingPost’s presence in Australia. We expect SingPost’s Ebitda (earnings before interest, taxes, depreciation and amortisation), including contribution from BEX Group, to be $160 million to $210 million in fiscals 2024 and 2025,” the report said.
“That said, we believe SingPost’s market share in Australia’s logistics market will remain modest even after the acquisition. This is due to the industry being highly competitive and fragmented.”
S&P calculates that the ratio of debt to Ebitda – or gearing – for SingPost will be four times to 4.7 times in fiscal 2024 (year ending March 31, 2024), assuming the acquisition goes through.
A higher gearing means that a company is using more debt to fund its operations, which may increase the financial risk.
“This compares with our previous forecast of three times to 3.5 times. Still, we expect leverage to improve over time, with debt-to-Ebitda to recover to below three times by fiscal 2026, according to our projections.”
S&P said the adjusted debt includes reported lease liabilities, incremental lease liabilities and contingent consideration payable.
It noted that the higher leverage comes on top of already weak SingPost earnings for the first half of fiscal 2024, no thanks to the normalisation of sea freight rates and foreign currency weakness, particularly the Australian dollar and Chinese renminbi, against the Singapore dollar.
That said, SingPost’s stable operating performance in Australia and higher domestic postage rates from Oct 9 partly offset the weak earnings, it added.
“Our negative rating outlook reflects the increasing risk of a downgrade due to persistent weakness in SingPost’s post and parcel business, and its shifting portfolio mix,” S&P said.
SingPost shares closed down 2.1 per cent at 48 cents on Monday.
