SingPost – DBSV

M&A could be the key catalyst

At a Glance

• Underlying net profit of S$37.3m (up 1% yoy) and quarterly DPS of 1.25 Scents were inline. Lower administrative costs offset the negatives.

• S$200m raised through note-issue in March, may be used for M&A to drive future earnings growth.

• To reflect growth potential through M&A, we switch to DDM based (Cost of equity 7.7%, growth rate 2%) TP of S$1.17.

Comment on Results

Lower administrative costs offset the negatives. Net underlying profit of S$37.3m (1% yoy, 2% qoq) was inline. We highlight that operating costs declined by 2% qoq despite 3% revenue growth qoq. This was achieved by bringing down administrative costs from S$18m in 4Q10 to S$14m in 1Q11, which also offset the impact of higher terminal dues and lower benefits from job credit scheme.

The key challenges for FY11F. (i) Adverse earnings impact (estimated S$3m) from higher terminal dues, although lower than initial estimate of over S$7m.(ii) S$5m reduction in job credit benefits in FY10F as the scheme expires in June 2010.

Potential M&A may drive growth. We like to remind investors that Singpost had issued S$200m 10-year note at fixed rate of 3.5% recently, which may be used towards regional acquisitions. Currently Singpost has invested about S$40m in higher yield financial instruments with average maturity of 2 years. In our view, Singpost is unlikely to deploy all of its funds for M&A in one shot. The company may utilize its funds in a gradual manner through a combination of financial instruments and M&A activity.

Recommendation

We do not see any risk to its dividends and recommend HOLD with DDM based revised TP of S$1.17.

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