Singapore Post: 7% yield plus low-single digit growth

Weakness in core business compensated by higher rental income. Net underlying profit of S$36.9m (-5% yoy, +13% qoq) was inline with our expectations of S$36m. Rental income stood at about S$10m (+74% yoy, +3% qoq), which helped cushion the weakness in the mail and logistics segments. While top line benefited from about S$17.5m contribution of its recently acquired subsidiary G3AP, impact on bottom-line was affected by additional expenses incurred in the consolidation of G3AP. We estimate, G3AP to contribute S$5-6m profits in FY10F.

Solid track record and better fundamentals than many REITS. Despite lackluster postal industry, Singpost underlying earnings have consistently shown improvement in the last 5 years. With earnings expected to show low-single digit growth on the back of regionalization strategy, Singpost¨s recurring yield of 7% is more attractive than many REITS, who may offer similar yields but earnings are more volatile.

Potential upside of 18% coupled with 7% yield. Due to increased risk appetite, we are changing the valuation methodology from normalized early cycle PER of 12x earlier. Based on 6% target yield (average historical yield), our revised TP is S$1.05, which translates to 13.5x FY10F PER, at 10% discount to its average historical PER of 15x.

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