SingPost – OCBC

Issues S$200m worth of notes

Issues S$200m worth of notes. Singapore Post (SingPost) is issuing S$200m in principal amount of fixed rate notes due 2020 with a coupon rate of 3.5%. With a denomination of S$250k, the notes will have a tenor of 10 years from the issue date. SingPost intends to use the net proceeds to finance new investments as part of its growth strategy. The group also expects to use part of it to fund anticipated capital expenditure and working capital requirements.

Comments on the note issue. We had previously mentioned that the group may have to replace or upgrade its mail processing system (bought in 1997-1998) by undertaking capex plans gradually. SingPost also has bonds (principal amount S$300m) maturing in Apr 2013. Given these reasons, this announcement did not take the market by surprise. In our view, it is also an opportune time to issue bonds now when interest rates are still low. As these are fixed rate notes, future increases in interest rates will not affect the group's interest expense.

Strong operating cash flows. SingPost's annual operating cash inflow has historically been substantial (average of S$164m each year from FY06- FY09). Standard & Poor's has also affirmed its AA- long-term corporate credit rating and axAAA ASEAN regional scale rating on SingPost, reflecting the group's "very strong market position in its core domestic and international mail business, high operating efficiency, and solid cash flow measures". Though S&P has revised the rating outlook to "negative" from "stable", this merely means that the long-term credit rating may be lowered, and is not necessarily a precursor of a rating change. Reasons cited were 1) weaker credit protection metrics for the next two years and 2) uncertainty over outcome of M&A activities. We note that even if the rating is lowered to A+, SingPost is still rated as "investment grade".

Broad-based recovery drives industry. Deutsche Post's CEO, Frank Appel, is "optimistic about the future, even though many uncertainties remain…"1 Led by strong Asian export volumes, FedEx recently reported an 18% jump in volume in its International Prority business2 , reflecting the region's recovery. With a broadening of the global economic recovery, arguably led by Asia, SingPost's plans to expand its reach in the region should yield positive results, if properly implemented. With the above reasons and more, we maintain our BUY rating on the stock with fair value estimate of S$1.16, giving a total return of about 12% (includes 5.8% expected dividend yield).

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