SingPost – OCBC

Cautiously optimistic on its outlook

1QFY11 results in line with expectations. Singapore Post (SingPost) reported a 13.5% YoY rise in revenue to S$138.2m and a 3.2% increase in net profit to S$40.7m in 1QFY11, just 1% shy of our estimates. Annualised results were also in line with the street’s estimates. Revenue growth was due to higher contributions in the mail (+11.4%) and logistics (34.4%) segments. The latter segment was boosted by the consolidation of Quantium Solutions for the full quarter compared to two months in 1QFY10. Recall that the acquisition was completed on 6 May 09. Rental and property income rose slightly by 1.6% YoY to S$10.1m. Excluding one-off items such as benefits from the Jobs Credit Scheme and amortisation of deferred gain on IP rights, underlying net profit rose 1% to S$37.3m.

Funds ready to be deployed. SingPost took advantage of the low interest environment in March to issue S$200m worth of fixed rate notes. We understand that the group has invested about S$38m in higher yielding financial instruments comprising mainly equity-linked notes (ELNs) and other bonds. The ELNs are related to dividend-yielding Singapore blue-chip companies and management explained that this is a temporary measure to generate better returns from idle funds before the group uses them in M&A activities.

Cautiously optimistic. The group is seeing an increase in business activities with an improving economy, but remains “cautiously optimistic” as it continues to face challenges in its industry, such as e-substitution and competition. As such, management reiterated its aim to grow its non-mail contributions and regional business for diversification and growth. More specifically, SingPost will push for regional growth through Quantium Solutions, especially in e-commerce logistics. Meanwhile, the group is also expanding in-country distribution networks in the region, especially in India.

Maintain HOLD. It has been about half a year since the group’s CEO left, and the search for a new CEO is still ongoing. We continue to like SingPost’s stable and resilient business but transformational growth is unlikely to happen overnight, given that the group aims to leverage on its core competencies, and the fact that the top position is still vacant. As expected, an interim quarterly dividend of S$0.0125/share has been declared. Given limited upside potential to our DCF-based fair value estimate of S$1.16, we maintain our HOLD rating on SingPost.

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