SingPost – DBS

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.

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