SingPost – UOBKH

Steady 2QFY08 earnings growth for an attractive dividend play

SingPost reported 2QFY08 net profit of S$39.7m, up 9.8% yoy. Excluding onetime items (comprising 2QFY08 sale of Clementi Central HDB shop unit), underlying net profit was up 10.9% yoy to S$34.8m. Revenue rose 8.8% yoy.

Direct mail was star performer in mail segment. Mail revenue rose 8.5% (or S$7m) yoy, and accounted for 73% revenue share, due to mail volume increasing 9.9% yoy. This came on the back of a strong 11.7% rise in bulk mail (80% share of domestic mail), due to a) Direct Mail’s increase of 15.1% (40% share of bulk mail); and b) business and others increasing 9.1%. Public mail (balance 20% share of domestic mail), on the other hand, recorded a mild 1.3% yoy volume growth. Correspondingly, mail operating profit rose 8.9% yoy.

Financial services drove retail segment. Retail revenue rose 9.0% (or S$1.3m) yoy. Financial services revenue surged 29.1%, and accounted for 47% of retail revenue. Remittances and unsecured lending together contributed 80% of financial services revenue.

Underlying operating margin of 37.1% is similar to 2QFY07. Mail operating margin was 39.1%, vs 2QFY07’s 39.0%. Retail operating margin also widened marginally to 16.3% (from 2QFY07’s 16.2%). These were offset by logistics operating margin narrowing to 14.3% (from 2QFY07’s 15.5%), as logistics is a very competitive business.

Robust cashflow generation. Net cash inflow from operating activities was S$79.7m in 1HFY08, up from 1HFY07’s S$74.6m. 1HFY08 capex was a low S$7.8m, or 3.3% of revenue.

High dividend yield. SingPost declared an interim dividend of 1.25¢ ps. SingPost aims to pay out 80-90% of net profit or a minimum of 5¢ ps per annum. We are forecasting 6.8¢ ps total dividends for FY08 (based on 85% payout ratio), giving a yield of 5.5%, which is higher than 3-mth SIBOR of 2.6%.

SingPost remains a BUY. We forecast 2HFY08 net profit to be driven by the increase in postage rates effective 18 Dec 06 and 1 Jul 07, as well as mail volume expansion. SingPost is attractive based on our DCF valuation of S$1.43 per share – we have assumed a terminal growth rate of 0.7%, a WACC of 5.8% (which factors in cost of debt of 4.6% and cost of equity of 8.2%).

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