Good numbers inspire confidence

Story: Singpost announced underlying net profit of S$38.7m up 11.4% y-o-y, near the upper end of our expectations. Costcontrol was the key again as expenses rose only 4.2% y-o-y compared to double-digit increase, which we saw in 2H08. As expected, interim dividend of 1.25 cents was announced.

Point: We want to highlight three key points.

1. Slowing economy is a concern, but not a big threat. Management revealed that Singpost was able to maintain flat revenues during the Asian financial crisis in 97-98 while revenue declined only 2% during the SARS crisis in 2003. In our view, a slowing economy could result in corporates cutting their spending, and we have modelled in a 1.3% decline in FY10 revenue, taking reference from previous crisis periods.

2. Singpost is tracking competition well. We believe that competitors have limited pricing flexibility due to the need to use Singpost’s network. Singpost launched several new initiatives in 2Q09 to further improve the quality and speed of its services. We think these initiatives should be effective in limiting the leakage of Singpost revenues.

3. Maintain FY09 estimates while reducing FY10 estimates by 6%. In 1H09, Singpost has already achieved 54% of our FY09 earnings forecast despite cost pressures from higher labor wages and oil price. Traditionally 2H is stronger than 1H due to more mail volume in the festive season. While there are challenges ahead, we believe that Singpost should be able to achieve the remaining 46% of full year net profits in 2H09. We have lowered our FY10 earnings estimates by 6% to factor the impact of the slowing economy and new competition.

Relevance: Maintain BUY with revised target price of S$0.85 pegged at lower 12x FY09 PER due to broader market de rating (Previously 15x due to historical trading range of 15-18x). Annual dividend of 5 cents is attractive. The stock is trading at 10x FY10 bear-case earnings, which implies limited downside.

SingPost commits to dividend policy

SINGAPORE Post announced yesterday that it remains committed to its minimum quarterly dividend policy of 1.25 cents per share, despite a 5.6 per cent year-on-year fall in net profit to $37.4 million for the second quarter ended Sept 30.

The weaker profit was due to a $1.3 million one-off expense from the winding up of an associated company in Q2 2008 and the inclusion in Q2 2007 of a one-off gain of $5.6 million largely from the disposal of a property. Excluding one-off items, the group’s underlying net profit was 11.4 per cent higher at $38.7 million.

Revenue for the quarter grew 4.1 per cent to $120.7 million on the back of improved performances across its three business segments – mail, logistics and retail. Earnings per share for Q2 were 1.943 cents, down from the previous corresponding quarter’s 2.065 cents.

For the first half of the financial year, net profit dipped 1.5 per cent to $76.88 million, from $78 million. Revenue rose 4.3 per cent year-on-year to $241.58 million.

Mail revenue for Q2 grew 2.8 per cent to $91.7 million as its various business lines – domestic mail, international mail, hybrid mail and the philatelic business – posted stronger contributions.

Logistics revenue was up 6.4 per cent to $18.8 million during the quarter as revenue from warehousing, fulfilment and distribution grew 28.9 per cent. vPOST also launched a new service, shop@Europe, during the quarter.

Continued growth in financial services such as remittances resulted in an 8.6 per cent increase in revenue to $16.6 million for SingPost’s retail business.

The group’s rental and property-related income also increased 39.3 per cent to $8.2 million due to higher rental income from Singapore Post Centre (SPC). The group is still continuing to review opportunities to unlock the value of SPC, it said.

Group CEO Wilson Tan said: ‘Like other companies, we face an increasingly challenging business environment. Cost containment becomes even more critical; we are taking additional measures to manage costs across the board. While we are focused on costs, we are not taking our eyes off our growth objective.’

SingPost closed at 65 cents yesterday, up 1.5 cents.

Still resilient

• In line. 2Q09 core earnings of S$38.8m (+11.4% yoy) were in line with consensus and our estimates. 2Q09 dividend of 1.25 cts/share also met our forecasts.

• 2Q09 sales +4.1% yoy to S$120.7m driven by: +2.8% mail, +6.4% logistics and +8.6% retail. Growth in logistics growth was from Speedpost, vPOST shipping transactions, warehouse, fulfilment and distribution. Retail growth was driven by financial services and agency fees. SingPost’s rental and property-related income increased by 39% to S$8.2m, driven by SingPost Centre’s higher rental income.

• Focused on cost management. Labour and volume-related expenses, which accounted for a large chunk of total opex, increased by 7.2% yoy and 4.0% yoy respectively.

• Gearing not a concern. The group has S$300m worth of bonds due in 2013. Cost of funding is at 3.13%. There is no financing concern as there is no rollover date in the short-term. We deem our forecast dividend yields as safe.

• Competition outlook. The Reference Access Offer document has been finalised by the IDA. SingPost expects margin pressure due to the liberalisation of the basic mail market and new entrants. We have included the impact of the liberalisation in our forecasts. The potential unlocking of value of Singapore Post Centre could be a catalyst.

• Upgrade to Outperform with lowered DDM-derived target price of S$0.94 (previous: S$1.20). Our FY09-11 estimates remains intact. However we align our cost of equity assumptions with house rates, resulting in higher cost of equity assumption of 8.8% (previous: 7.2%). Given that the stock price has fallen by more than 40% in the past one month, thanks to weak market sentiment, we believe that it is timely to upgrade SingPost as it continues to offer investors defensive earnings and dividend yield of more than 10%.