SingPost – UOBKH

Competition worries receding?

Singapore Post (Singpost) has just submitted a modified Reference Access Offer (RAO), which details the procedures and charges on which other postal service providers can gain access to SingPost’s distribution network. Our preliminary reading of the papers suggests competition worries would recede if this modified RAO gets approved by IDA. We also like the company’s stable dividend yield, thanks to its strong operating cash flow. Maintain HOLD.

Competition worries receding? In response to comments by the Infocommunication Development Authority of Singapore (IDA), Singapore Post submitted its modified RAO papers yesterday. The papers detail the procedures and charges for postal service providers that want to gain access to SingPost’s distribution network. From our preliminary reading of the papers, we feel the modifications of access rate schedule are mild. For example, under the Postal Competition Code, SingPost will set its RAO rates to other mail service operators at the standard retail prices minus a discount (equivalent to costs avoided arising from higher economies of scale due to the processing of large quantities needed by operators). In the modified RAO, SingPost maintained its avoidable costs at 1% of its standard retail price. Previously, the feedback from other operators indicated that the rates proposed would not allow them to sell services profitably. Subsequently, competition pressure could ease for SingPost if the modified RAO offer gets approved.

Waiting to see how IDA would regulate RAO rates and execute new competition framework. IDA has not set a deadline for finalising the RAO papers. However, we expect IDA to finish reviewing SingPost’s modified RAO within one month, by Oct 08, like it did in the first round of review. It will likely take another 2-3 months for other operators to negotiate prices and terms with SingPost. We expect competition to kick in from 2009. As of now, four new entrants have been granted postal services licences.

We like the decent yield though. SingPost outperformed the market only in end-FY06 when it declared a special dividend of 10¢/share. The price catalyst from a special dividend, possibly from the sale of Singapore Post Centre, would be less likely in the near term against the backdrop of a softening commercial property market in Singapore

With its extensive distribution network and access to master keys, SingPost could still enjoy robust cash flow to sustain its dividend policy of 80-90% payout or a minimum of 5¢/share p.a. In 1QFY09, SingPost registered operating cash flow of S$52m, compared with a dividend payout of S$24m(1.25¢/share). We expect operating cash flow to dividend to be maintained at 1.4x in FY09-10.

We value SingPost at S$1.07, on a par with our DCF valuation per share (WACC: 5.7%; terminal growth rate: 0.5%). The stable dividend yield limits the downside risk under in the current volatile market environment.

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