SingPost – Kim Eng

Marvellous makeover

What’s New

• Singapore Post (SingPost) has demonstrated earnings resilience in the face of structural changes in the global mail industry. Its efforts to diversify into the nonmail business since its listing in 2003 have paid off with the segment contributing 31% to operating profit in FY Mar11 from 15% in FY Mar05. The stock currently trades at a premium over its peers, given its superior ROE and steady free cash flow that exceeds its dividend

commitment. We upgrade our rating to BUY from HOLD with a target price of $1.18 (total return of 19%).

Our View

• SingPost has made strategic investments in logistics companies in Malaysia, China and Vietnam this year. In the second half of the year, it will launch a digital mailbox service, VBox, to engage customers in the digital space. Initiatives like these are helping the group to mitigate the general trend of mail volume decline.

• SingPost has a strong cash balance of $345.4m as at June 2011. Its six acquisitions yeartodate have used up only about $63m out of the $200m raised in March last year. With net gearing at a comfortable 50% level and no nearterm refinancing needs, it means Dr Wolfgang Baier, the newly appointed CEO for international operations, will have greater flexibility to carry out the group’s regionalisation and diversification plans.

• The withdrawal of Capital Group as a substantial shareholder last month caused SingPost to grapple with a slight share overhang. However, the group’s buyback of 33.2m shares since June has provided firm support.

Action & Recommendation

Our target price of $1.18 is pegged at the historical average PER of 14x (implied yield of 5.3%). We believe the catalysts for rerating would come from further cash deployment for acquisitions that would bolster longerterm earnings growth prospects. Upgrade to BUY.

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