SingPost – CIMB

Rising headwinds

In line. SingPost’s 3QFY08 earnings of S$36.8m (+7.9% yoy) were in line with consensus and our estimates. 9MFY08 earnings form 77% of our FY08 earnings estimate. This was a satisfactory set of results with topline and margins coming in within expectations. A DPS of 1.25 cts was also within expectations. Key highlights were: 1) sustained cost pressure; and 2) rising competition from the ongoing liberalisation of the postal system.

Decent revenue growth. Topline growth (+9.2% yoy) was driven by direct mail (+28% yoy) on the back of a robust domestic economy. Logistics grew 5.3% yoy on increased Speedpost traffic and growth in vPOST online shopping transactions. Retail revenue grew 7.9% yoy as growth in financial services (+16.4% yoy) was offset by a continued decline in agency/bill presentment services.

But margins were eroded. EBIT margins declined 90bp yoy to 37.8% on the back of rising costs (labour and volume-related) as well as the product mix (faster growth of lower-margin direct mail business). We also note sustained pressure on agency/bill presentment services which overwhelmed gains from financial services. We expect the margin pressure to mount from ongoing liberalisation of the postal system.

• Trimming earnings estimates. We maintain our FY08 earnings estimate but trim FY09-10 estimates by 2-3% to reflect margin pressure from higher labour costs as well as impending competition from liberalisation of the postal system. Our earnings downgrade is buffered by our expectation that SingPost will be able to offset some margin pressure through productivity improvements.

Downgrade to Neutral from Outperform with lower target price of S$1.20 (previously S$1.41). Our DDM-based target price has been reduced for two reasons: 1) a higher cost of equity of 7.2% from 6.5% previously on evidence of higher earnings risk from sustained cost pressure, substitution as well as impending competition; and 2) our earnings downgrade. The stock lacks catalysts in the near term and we are unconvinced that management will unlock value from the Singapore Post Centre anytime soon. Nevertheless, downside should be limited by a dividend yield of over 6%.

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