SingPost – UOBKH

Slower Growth Ahead; HOLD For Yield

Net profit up 2.9% to S$39.5m. Singapore Post’s (SingPost) revenue grew 4.6% yoy to S$120.9m in 1QFY09, with the mail segment contributing 73% of total revenue. The core business, the mail segment, saw modest revenue growth of 2.4% yoy and flat international mail growth, mainly driven by 4% yoy growth in domestic mail. EBIT margin widened to 40.6% in 1QFY09 (39.3% in 1QFY08), partly due to less selling expenses and slower growth of volume-related expenses.

Competition overhang. Under the competition framework set by Infocommunication Development Authority of Singapore (IDA), SingPost will continue to hold the master keys but it must provide other postal service operators with access to its distribution network. How IDA regulates Reference Access Offer (RAO) rates and executes the new framework will be closely watched. Four new entrants have been granted postal services licences.

Not so defensive against economic slowdown. According to IDA, business users account for more than 90% of total domestic mail. Therefore, a slowdown in business activities would hurt SingPost’s business. This is evidenced by the slight dip in mail volume handled in FY03 (Apr 03-Mar 04) when Singapore was hit by SARS. The moderated revenue growth in the past few quarters, especially from the mail segment, signals an economic slowdown. If economic uncertainties continue, SingPost could see slower growth ahead.

Decent yield warrants a HOLD. We downgrade SingPost to HOLD with a fair price of S$1.07. Our valuation is based on the DCF model (WACC: 5.7%; terminal growth rate: 0.5%). We suggest accumulating at S$0.96 or below. Upside risk could come from a special dividend payout.

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