Singapore Post: Time to factor in growth possibilities

Bumping up earnings estimates. We have tweaked our earnings estimates to take into account G3 Worldwide Aspac (G3AP)'s contribution to the group's revenue. We had earlier refrained from doing so given the uncertainty of its impact in the face of a fragile global economy. Although the general mood is still cautious given that government stimulus packages have not resulted in a sustained recovery in consumer spending (amongst other risks present in the global system), we now deem it appropriate to increase our earnings estimates by about 6% to incorporate G3AP's earnings. Overseas revenue now accounts for 8.2% of total revenue compared to only 0.4% previously.

Recovery underway but not time to party. Composite leading indicators of key OECD countries are continuing their upward trend after reaching their inflexion points around 1Q09. 2Q09 GDP growth cues have also been largely positive, especially for Asian economies. While there are still doubts on fundamental recovery in the financial markets, there is no denying that an improvement in investor sentiment has allowed companies and banks to raise capital and shore up their balance sheets. However, certain risks, such as 1) deteriorating personal credit and loans in the US, 2) possible build-up of asset bubbles in China, and 3) possible weak private sector spending in major economies after government stimulus plans wear off, threaten to destabilise the global economy and hence Singapore's economy. As SingPost's earnings are significantly correlated with Singapore's GDP growth, it is worth noting the possible trajectories of the global economy.

Worldwide postal sector only feeling a pinch. According to a Universal Postal Union survey, postal operators are definitely feeling the effects of the crisis, but are "not showing signs of an economic depression". Shares of listed postal operators have performed well during this crisis, given their relatively defensive nature (Exhibit 2). Besides having a decent dividend yield, SingPost is also pursuing growth, as seen by its recent M&A deals, enhancing the attractiveness of the stock.

Maintain BUY. SingPost is still the dominant player in Singapore's postalindustry despite threats from new competitors, and we foresee its strong operating and free cash flows to continue to buttress its reputation as a stable and well-run business. Meanwhile, it is taking the opportunity to grow its regional network during this downturn, which is definitely a positive development. With the incorporation of G3AP's future earnings, we have also raised our fair value estimate to S$1.09 (prev S$0.97). Maintain BUY.

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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.

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.

Singapore Post: Control at the helm induces confidence

Results in line with expectations. Singapore Post (SingPost) reported a 0.7% YoY rise in revenue to S$121.8m and a 0.1% YoY fall in net profit to S$39.4m for 1Q10, accounting for 25% and 27% of our full-year estimates respectively. Mail revenue was 7.2% lower with a decline in mail volumes while logistics revenue rose due to a consolidation with G3 Worldwide Aspac (G3AP) after the acquisition in May. Rental and property-related income improved with higher rental income from the Singapore Post Centre (SPC) and leasing of space at re-purposed post office buildings. SingPost is definitely feeling the impact of the economic downturn but has taken steps to preserve and even grow the business.

Two M&A deals in 1Q10. SingPost acquired the remaining 50% stake in G3AP in exchange for its 24.5% interest in G3 Worldwide Mail and cash payment of 7.5m euros. The group also announced in May that it will invest in Postea, Inc which will help it further develop its own intellectual property. It is good to know that SingPost has taken the opportunity to invest during a time when many other cash-strapped companies can only stand by as onlookers. It is also worth noting that SingPost has substantial cash of S$184.9m as at 31 Jun 09.

Focus on cost control and growth at the same time. There will be a terminal dues hike in 2010 which will impact SingPost from a cost standpoint. The Company plans to put in place strategies that will mitigate the increase in costs such as streamlining efficiency in mail traffic moving out of Singapore (in terms of weight and volume). Bilateral agreements with other postal companies may be explored as well. Meanwhile, G3AP's wider footprint means there are more options to move mail internationally through this system.

Maintain BUY. While impacted by the global slowdown, SingPost's business remains relatively resilient compared to most other companies. We are keeping our estimates until we see more robust signs of recovery. The group will be paying an interim dividend of S$0.0125/share, consistent with its dividend policy. We have raised our fair value estimate for SingPost to S$0.97 as we adopt a lower cost of equity (8.4% compared to 8.8% previously) following reduced risk aversion in the market. Maintain BUY.

SingPost is committed to paying a minimum DPS of 5 cts p.a

S$303m 10-year bonds, with a maturity period of 10 years from 11 Apr 03 (3.13% fixed interest p.a.) will be expiring in 2013. No funding proposals yet, SingPost will not likely repay the entire sum. The company has gross cash of S$139m (as of end-Mar 09). The other major asset is its main building Singapore Post Centre which is carried at historical cost (just below S$300m). This building is 50% occupied by SingPost with the remaining 50% rented out.

Maintenance capex is about 5% of revenue over the past 3-5 years. Management doesn't expect major capex in the next 1-2 years. However, SingPost's mail-sorting system will be more than 15 years old in 2013-14 and hence would require upgrade. Management does not expect it to cost S$100m (the original capex of the existing mail-sorting system) as SingPost's current equipment is well maintained and technology has reduced replacement cost.

During the Asian Financial Crisis (AFC), mail volume dipped by 2%. The current economic downturn started having an impact in 3QFY09 and 4QFY09 (year-end- 31 Mar). 4QFY09's mail revenue dipped by 2.1% yoy, suggesting that the impact of the current economic downturn is similar to that of AFC.

SingPost continues to look into ways to cut costs. 40% of its operating cost is labour (of which, a quarter is due to flexible workforce such as part-time staff). 40% of its remaining operating cost is volume related. Including the flexible portion of labour cost, a large portion of operating cost is flexible and can be scaled back in tandem with mail volume contraction.

The bulk of SingPost's current revenue is generated from local demand. SingPost targets to grow its overseas revenue from 3% currently to 10-15% in 3 years' time by increasing non-regulated mail volume in its overseas network e.g. Singapore is a printing hub for the region and can be a regional distribution centre for publications.

Dividend policy - SingPost is committed to paying a minimum DPS of 5 cts p.a (5.9%). FY09's DPS was 6.25 cts (7.4%) or 80% of FY09's EPS of 7.73 cts.

Consensus EPS forecasts are 7.43 cts and 7.26 cts for FY10 and FY11 respectively. Stock is trading at 11.4x and 11.6x respectively. Net gearing is 0.64x.

SingPost Investment in Postea Inc.

SingPost announced today that it will acquire a 30% stake in Postea Inc., a postal and logistics technology company, incorporated in Delaware, USA. The total consideration is US$33.7m, comprising US$9.4m cash payment, and non-cash consideration of US$24.3m for the licensing of SingPost’s intellectual property rights to Postea. This would include IP rights in its Self-service Automated Machine (SAM), SAMplus, POST21 and vPOST systems.

Postea was founded in 2007 and specialises in providing automation technology solutions for the postal, courier and logistics markets, such as automated parcel processing systems. Its subsidiary Innovations Group is currently the contractor for the US Postal Service providing mailing systems to Contract Postal Units across the country. We believe Postea is not immediately earnings accretive.

The transaction recognizes SingPost’s postal technology IP rights as intangible assets, which we believe will result in an extraordinary gain for FY10 of cUS$24m. More importantly, we believe Postea will serve as the platform for SingPost to “productise”, further develop, and leverage its internal postal technologies going forward.

Our price target of S$0.96 is derived from DCF assuming 9.5% COE and 3% terminal growth. At our price target the implied FY10 yield is 5.8%.

Singapore Post: Your dividend's in the mail

Results in line with expectations. Singapore Post (SingPost) reported a 2.9% YoY fall in revenue to S$115.6m and a 2.5% rise in net profit to S$35.5m for 4Q09, in line with expectations. For the whole year, revenue rose 1.8% to S$481.1m while net profit was flat at S$149.5m. Mail revenue was lower due to a decline in international mail contribution while logistics revenue was steady against 4Q08. Rental and property-related income improved with higher rental income from the Singapore Post Centre (SPC) as well as additional income from leasing of space at re-purposed post office buildings. This is commendable performance at a time when the country is facing its worst contraction since independence.

Capex needs for machines likely to be gradual. SingPost's mail- processing system cost the group about S$100m in 1997-98 and it may either have to be replaced or upgraded around 2013-14. However, it is also likely that the group undertakes its capex plans gradually instead of incurring a lump sum expenditure in a single year. Management said they have yet to arrive at a decision and have entertained the option of funding capital needs by a combination of internal resources and additional debt if a huge revamp is needed. SingPost's net gearing is at 0.64x (all borrowings are bonds maturing 2013).

Impact of competition not great yet. Despite having new postal service operators coming on stream, the group attributes a large part of the slowdown in earnings growth to the economic downturn rather than new competition. We are optimistic of the group's ability to retain market share given that incumbents (and SingPost being the dominant player) are generally able to fare better than new entrants in a downturn. It is also good to note that most of the group's competitors are also its customers and there is some cooperation among the companies.

Maintain BUY. True to its relatively defensive nature, SingPost is paying out a final dividend of S$0.025 per share, meeting our expectations of a full year payout of S$0.0625 per share. This comes at a time when most companies are cutting or avoiding dividends altogether. We like SingPost for its strong operating cash flows though we note that it is not immune to the downturn and is likely to continue to feel its impact. Maintain BUY with S$0.91 fair value estimate.

SingPost - Still defensive with decent yield

Despite a weaker 2H, full year net profit fell only 0.3% yoy to $148.8m with the benefit of $2.3m in Budget aid measures (i.e. Jobs Credit) and $1m from the 1% corporate tax reduction. Adjusted for these and $1.9m in winding-up costs of an associate company in FY09 and $9.3m in adjustments from other one-off items in FY08, underlying net profit rose 4.8% yoy to $146.8m in FY09, largely within our expectations of $148.2m.

4Q09 revenue fell 2.9% yoy, reflecting the impact of the economic contraction. As expected, the retail and mail businesses were the most affected, down 7.7% and 2% respectively, with the latter hit by a slump in international mail (-6.7% yoy). However, operating costs fell by a faster 6.3% to offset the decline in revenue. Even after grossing back $2.3m in Budget savings, operating costs still fell faster than revenue (-3.8%).

SingPost also declared a final dividend of 2.5 cents, bringing total annual dividend to 6.25 cents, the same as FY08, as cashflow was maintained despite the economic contraction that has resulted in SingPost tightening up financial measures such as raising provision for doubtful debt.

SingPost recently announced it has increased its stake in G3AP, an associate company that provides cross-border mail services within Asia Pacific with a 10-country network, from 50% to 100%. Following the consolidation, G3AP will increase its mail services to include SingPost’s other competencies, such as logistics, warehousing, fulfilment, etc. Although a small move at this stage (costing only $15m), we believe SingPost is likely to speed up its regional agenda given the downturn.

Conservatively, we have lowered our FY10 forecast by 7.6% and our dividend forecast to 5.5 cents. However, we still like the relative defensiveness of SingPost’s business model and its robust cashflows. Even though dividend has been lowered, yield is still decent at 7.2%. Maintain BUY with target price lowered due to revision in FY10 forecast.