SingPost – JPM

1Q FY11 results review

1Q FY11 results in line: Revenue of S$138MM was up 13.5% Y/Y largely on the back of 11.4% increase in mail revenue and 34.4% increase in logistics revenue (1Q10 Quantium Solutions contributed only 2 months of revenue). Net profit of S$40.7MM (+3.3% Y/Y) was in line with our expectations. An interim DPS of 1.25 cents was declared per previous years.

Strong bulk mail volume growth: For 1Q11, volumes in bulk mail grew 10.9% where direct mail rose 20.2% and business mail rose 3.5%. Public mail volumes, however, saw a slight decline of 0.2%, evident of gradual esubstitution. Overall mail volume was higher by 9.1%, resulting in a 9% improvement in domestic mail revenue. Despite the strong volume growth, mail operating margin was only slightly higher at 37.8% (1Q10: 37.2%) due to higher operating expenses and potentially due to the onset of higher terminal dues for international mail. However, management highlighted that the impact of higher terminal dues on underlying profit has been less than the 5% as previously guided, as it engages in mitigating measures such as entering into bilateral arrangements to send out international mails via overseas postal operators which are not subject to the higher terminal dues.

Operating cashflow weaker on higher working capital: Operating cashflow dipped from S$68MM to S$29MM on increased working capital requirements. However, management guided that these are due to timing differences and expects free cash flow for FY11 to be similar to FY10.

Invested in equity-linked notes: SingPost invested S$38MM of its cash in equity-linked notes (ELN) relating to dividend-yielding Singapore blue chip companies with effective yield of 3-5%, with the intention to partially offset the higher interest costs from its S$200MM, 3.5% fixed rate notes (FRN) issued on 30 March 2010. The ELN are not capital protected. If management does not find suitable M&A targets, it may invest a greater portion of the FRN proceeds into other high-yield financial instruments in the interim. It is necessary that management deploys the cash it raised constructively soon, in our view, otherwise this may result in a decrease in its ROCE and a potential de-rating of the stock.

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