SingPost – DBS

Sweet dividend surprise!

• Core net profit exceeded expectation due to higher rental income from the optimization of leasing space
• Final 2.5 cents DPS doubled our 1.25 cents forecast, and implies 8.2% annual dividend yield
• Raised FY10F
earnings by 3% due to decent rental income. Upgrade to BUY with higher target price of S$0.94

Rental income boosted results. Core net profit of S$32.6m (-3% yoy, -11% qoq) was better than our S$31m estimate. Although the impact of the current recession was visible in its business mail and logistics segments, rental income surged to S$9.7m (+17% qoq, +50% yoy) due to optimization of leasing space and lease renewals. Management highlighted that rentals are still higher than three years ago, and given its average 3-year lease tenure for lettable space, lease renewals led to higher income for Singpost.

Machine capex will be lower than expected, so no dividend cut. Management indicated that capex for the replacement or upgrade of its mail-sorting machine in 2013-2014 would be S$70m-S$100m, lower than our previous S$150m estimate. Going forward, Singpost should be able to payout S$120m cash (6.25 cent DPS) and retain S$30m cash each year, sufficient for funding capex of S$100m in 2013-14.

Raised stake in associate, secures earnings growth for the medium term. Singpost raised its stake in G3 Asia Pac from 50% to 100% recently by paying under 4x PER. This is an attractive deal, as Singpost paid only S$15m, to increase its annual net profit by S$4m on a recurring basis.

Upgrade to BUY, target price of S$0.94. Our target price is based on normalized early cycle PER of 12x (historical average is 15x). But the key attraction is the r 8.3% yield and earnings enhancement from expansion and cost cuts.

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