SingPost – DBS
The hunt for acquisition?
• Strong credentials help Singpost raise cheap debt.
• Potential investments should more than offset weakness due to higher terminal dues.
• HOLD with TP of S$1.05 based on 6% target yield.
Strong credentials help Singpost raise cheap debt. Singpost is issuing S$200m 10-year notes at fixed rate of 3.5% per annum. The company intends to use the proceeds for (i) working capital requirements (ii) machine related capex and (iii) regional investments. S&P has rated the notes as AA-, the same rating that Singpost secured for its S$300m notes issued in 2000. Although, not reflected in our model yet, it would raise FY10F net debt to equity to 1.3x from 0.5x.
Free cash flow adequate for capex and working capital, in our view. Management had earlier indicated that capex for replacement or upgrade of its mail-sorting machine in 2013-2014 would be S$70m-S$100m. Assuming dividend payout of S$130m cash (6.7 Scts DPS) and S$30m cash to be retained each year, Singpost should generate sufficient operating cash to fund machine capex in 2013-14. We do not see any issue with refinancing of existing notes in 2013 either
Potential investments (if any) could more than offset weakness due to higher terminal dues. While Singpost has not indicated anything specific, our key assumption is that Singpost can make S$200m worth of investments in the region (possibly logistics industry as indicated earlier) at a reasonable 12-13x PER, similar to its own. After deducting the cost of debt, the investments would still add S$10m or 6% to Singpost FY11F earnings. This should offset potential weakness of up to 5% due to higher terminal dues (interoperator charges) in the international mail segment as Singapore has been re-classified as a developed country from March 2010 onwards (was not reflected in our model).