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.

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Singtel Hold: No Immediate Catalyst Though

What’s working for the stock: (1) A$ strength: +10% versus S$ since early Mar; (2) Strong Bharti and Telkom stock prices; (3) #1 and #2 leave stub (Sing+ Optus) valuations at all time lows/ stock price around historical low relative to spot sum-of-parts; (4) Low (A$/ weak associate driven) FY09E (EPS -10%yoy) sets up for decent (we see ca+11% EPS yoy) rebound into FY10.

Negatives and concerns. (1) Weak Singapore economy weighs on revenues – we agree but see cost controls minimizing EBITDA damage. (2) No growth in Optus – yes, but largely in expectations which by the way also reflect nothing for NBN opportunities and mobile consolidation: longer term positives? (3) M&A initiatives – always on the cards, value for price will be key; (4) Defensive stock a source of funds into market rallies – we are seeing that now.
What to watch with 4Q results due May 14th? We see FY10 guidance as a focal point. Many moving parts into our 11% recurring EPS growth view for FY10E include: (1) NBN impact in Singapore (margin,capex); (2) Optus – does mobile focus move back to margins (versus rev), in which case our 3.5% EBITDA growth view could have upside (our estimates incorporate A$/S$ parity); (3) Associates up 23%yoy (after 21% fall in FY09) as Telkomsel recovers.

We see capital management delivery as unlikely. We think SingTel prefers to keep its powder dry into uncertain markets and dynamic investment prospects. We see 7.7cents in final DPS (60% payout, interim DPS was 6.5cents). For 4Q specifically, we see S$924m (-5%yoy) in recurring profits; S$1.06bn in EBITDA (-9%yoy). We see associates contribution at S$536m (-17%yoy, +10%qoq).

DBS - Rights come with a price

DBS’s recent S$4bn rights issue has bolstered its balance sheet, but we expect immediate EPS dilution and a big drag on ROE. We do not believe the company can maintain its final-quarter dividend of S$0.14 through 2009, as the payout would exceed 60%. We also believe management’s organic growth focus to expand its loans above (Singapore) system pace and to take market share in 2009 could place additional pressure on asset quality and lower potential dividend payouts.

We expect a slightly better net profit (quarter-on-quarter) for 1Q09 from a decline in operating expenses and slightly lower provisions. DBS’s net-interest income should improve as a result of higher lending margins, but we expect the low SIBOR to keep its overall NIM flat. We forecast a sharp quarterly dividend cut to S$0.10 (compared with S$0.14 for 4Q08).

DBS’s shares are trading above our zero-growth DDM value of S$6.16 (excluding final-quarter dividend for 2008). We have assumed a CAPM-derived cost of equity of 7.69%. Our new target price is equivalent to 0.60x book (December 2008, adjusted for the rights issue). The stock’s previous PBR troughs were in 2003 (0.84x) and 1998 (0.39x).