Attractive entry point for a defensive play

Story: Underlying net profit of S$38.9m (11.6% y-o-y, 15.6% q-o-q) was above our S$35.0m forecast. The surprise came from lower than expected increase in operating expenses, up only 3.4% y-o-y compared to our estimate of 10%. Rental income at S$7.2m (up 35% y-o-y, 11% q-o-q) also improved due to higher rental rates and an increase in lettable space.

Point: Operating expenses were lower than expected mainly due to (1) lower traffic expenses from route optimization for international mail business and (2) lower selling expenses as marketing activities have been planned for later part of the year. Nevertheless, management is not ruling out cost pressures in the near term. Thus, despite the better than expected 1QFY09 numbers, we are not revising up our FY09 earnings estimates.

Relevance: With this set of results, management has shown its ability to control costs in the current inflationary environment. The stock plunged over 13% in the last three months on concerns on cost pressures, and now presents an attractive entry opportunity in our opinion. We upgrade Singpost to BUY with unchanged target price of S$1.12 pegged at 15x FY09 PER (based on the lower end of its historical range of 15-18x).

Update on potential building sale. HQ building sale is currently in the exploratory stage. We believe that management is aware of the stream of rental income from the building and any decision to unlock the value would be done with that in mind. In the last set of results, management had highlighted esubstitution as an area of interest for growth. We think that part of the sale proceeds from potential sale of HQ building could be used for acquisition in this area, while the rest paid out as dividends.

SingPost’s Q1 profit rises 2.9%

SINGAPORE Post saw net profit grow 2.9 per cent year on year to $39.5 million for its first quarter ended June 2008. The rise came on a 4.6 per cent increase in revenue to $120.9 million, as SingPost’s three business segments did better.

The mail business recorded 2.4 per cent growth in revenue to $93.6 million on higher traffic, while logistics revenue increased 11.8 per cent to $18 million. Growth in retail products, agency and financial services revenue contributed to a 17.6 per cent increase in retail revenue to $16.5 million.

The group’s rental and property related income was up 34.9 per cent to $7.2 million, mainly due to higher rents at Singapore Post Centre and an increase in lettable space.

Excluding one-off items, the group posted underlying net profit growth of 11.6 per cent to $38.9 million. SingPost has declared an interim quarterly dividend of 1.25 cents a share.

‘The group will continue to explore opportunities in unlocking the value of Singapore Post Centre,’ SingPost said.

1QF08 Results Better than Expected; Operating Cost Pressures Remain a Concern

Conclusion: We retain our Equal-weight rating and price target of S$1.23. We like SingPost’s stable and defensive dividend yield of 6% per annum, but slowing core mail segment growth and operating cost pressures, although partially mitigated by effective management strategies, are a concern.

What’s new: SingPost reported 1QF08 net profit of S$39.5 million, a 3% improvement from 1QF07, above our expectations. Excluding the one-off gains from sale of the Boon Lay post office and gains from sale of the US business of the Spring JV in 1QF07, recurring net income improvement was higher at 13%.

Implications: With stable dividend yields of 6% per annum, we view SingPost as attractive to investors seeking refuge from market volatility. We believe that the potential unlocking of hidden value in SingPost Centre, possibly via a sale of the building, is in the preliminary stages and unlikely to occur within the next six months. Conversely, should the building be sold, we believe that this could result in a potential special dividend payment of S$0.19-0.34/share, implying a special dividend yield of 19-33% at the current share price. This would be a strong upside catalyst for SingPost stock, in our view.

1Q09 in line. Waiting for catalysts

• SingPost’s 1Q FY09 results came in line with expectations: Recurring net profit accounted for 25% of our full year earnings estimate. The 2H08 issue of costs outpacing revenue growth seems to have been brought under control. Operating costs increased by 4% y-o-y mirroring operating revenue growth of 4.6% y-o-y to S$121MM. Recurring net profit for the group overall grew by 11.6% y-o-y to S$38.9MM on the back of the contribution from the non-mail divisions i.e. logistics and retail. Logistics and retail operating profit grew by 33% and 42% y-o-y respectively but only contributed S$2.8MM each whereas mail operating profit was up only 1% y-o-y to S$37.5MM.

• Operating costs seems to have been brought under control for now due to better outsourcing of volume-related costs and a reduction in SG&A. Unionized labor is still the main source of cost pressure, up 10.8% y-o-y but within expectations. Labor now accounts for 41% of total operating expenses but is still far lower than the 60-80% range of global peers. Management warns that cost pressures will continue going forward and it will do its best to counter this with increased productivity.

• As expected, SingPost declared its usual quarterly interim DPS of 1.25 cents, half of the operating cash flow for the period. We expect the company’s final year gross dividend payout to track close to its free cash flow, growing 8% a year.

• A key risk to our DCF-based Dec-08 S$1.10 PT is industry deregulation and the UN classification of Singapore as a developed country, which would imply higher postage fees for international mail. It would be very hard for any new entrant to mount credible competition, but any impact would have repercussions on the very stagnant mail business. Key catalyst for the stock is the monetization of SPC and a special dividend.