SingPost – DBS

Expenses raise their ugly heads

Story: Underlying net profit of S$33.6m (-1.2% y-o-y, -8.0% q-o-q) was below our S$35m forecast as 13% y-o-y increase in operating expenses (excluding impairment charge of S$4.9m) was above our already high single digit growth estimate. The company declared final dividend of 2.5 cents taking full year dividends to 6.25 cents.

Point: Operating expenses grew mainly due to (1) rising wages (2) higher traffic volume coupled with higher oil price and (3) higher selling expenses for boosting retail sales. Management has guided for stabilisation of operating costs at 4Q08 levels, which means that 1Q09F and 2Q09F could be hit by high cost base compared to the corresponding quarters in FY08. Moreover, postal liberalisation, although not very significant, can put additional pressure on Singpost’s margins.

Relevance: We have trimmed our FY09 earnings estimates by 6.5% on lower margin assumptions. In view of an uncertain property market, sum-of-the-parts valuation based on assumed sale of SPC building, may be less relevant now. Our new target price of S$1.12 is pegged at 15x FY09 PER (based on historical range of 15-18x) and we downgrade Singpost to HOLD. Stable earnings with 5.5% dividend yield remain as key attraction of the stock.

Update on potential building sale and acquisition. The area around Singpost building was identified as a sub-regional centre in 2007. Singapore Government is expected to unveil its Master Plan for 2008 in the next few months and. depending on the details; SPC building could become more valuable, subject to the property market valuations. We still think Singpost can unlock value out of SPC‘s sale and proceeds could be used for acquisition and special dividends. However, potential acquisition (management highlighted esubstitution as an area of interest) and potential relocation of operations from SPC building are still some of the unknown variables in the equation.

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