SingPost – JPMorgan

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.

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