Below expectations

1Q10 revenue was flat YoY at $122m mainly due to the consolidation of G3 Worldwide Aspac (G3AP). Net profit was also flat at $39.4m, including $2m in benefits from the Jobs Credit Scheme. If not for G3AP, revenue would have fallen 7% YoY to $113m while net profit would have fallen 12-13% to $34.5m, even with the Jobs Credit boost. The regular quarterly dividend of 1.25 cents was maintained.

Mail revenue fell 7% YoY vs our forecast of a 3% decline, international mail down 12%, while logistics fell 6% and retail agency fell 7%, all suffering the effects of the reduction in economic activities. Also, SingPost did not recognise US$24m in gains we had expected. As part of the Postea investment in Apr 2009, SingPost realised the market value of some of its postal-related intellectual property.

We have cut our FY10 forecast by 11% as the Postea gain will now be amortised over three years instead of being recognised immediately. SingPost was advised by its auditors to amortise the gain over the duration of its contractual collaboration with Postea instead of recognising 100% of the gain in FY10, as was the original intention.

International terminal dues are expected to increase from Jan 2010 onward. Terminal dues are fees SingPost has to pay overseas postal operators for the cost of delivering mail. We estimate volume/traffic costs could increase by 4%-points in FY11. Net of the Postea gain, we have cut FY11-12 forecasts by 4%.

We downgrade the stock to Hold as share price upside is now only about 10% to our target price. Also, negative catalysts could arise on the cost front if SingPost is unable to offset the higher terminal dues by controlling its internal costs or by pushing the Infocomm Development Authority for higher postal rates.

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