SingPost – DBS

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.

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