SingPost – OCBC

SET TO DELIVER ON RAINY DAYS

Defensiveness amid uncertainty

Larger deals may be catalysts

Upgrade to BUY

Increasingly favourable risk-reward ratio.

2012 is likely to present a highly uncertain environment for investors, and we think the 1) defensiveness of SingPost’s business, 2) its consistently decent dividends and 3) the recent stock price correction means the stock’s risk-reward ratio is increasingly favourable for equity investors. The group is also on an acquisition trail to seek further growth opportunities.

Backed by stable operating cash flows.

We like SingPost for its stable operating cash flows given its noncyclical business. Historically, SingPost has weathered economic downturns well, with flat revenues during the Asian financial crisis, a marginal 2% fall during the SARS crisis and a 1.8% growth during the 2008 downturn. The group also has a strong balance sheet and a dominant market position in the local scene. Such factors render it an attractive stock given the expected market volatility in 2012.

Well-perceived deals as catalysts for stock.

The group has been active in acquiring stakes in companies outside of Singapore for both business and geographical diversification, though deal sizes have been relatively small. Looking ahead, we expect to hear more news on the M&A front, especially in logistics and ecommerce. Opportunities can best be found during periods of market uncertainty, and sizeable M&A deals may be catalysts for the stock should SingPost make acquisitions that are well-perceived by the investing community.

Upgrade to BUY.

SingPost has been consistent in its 6.25 S cents/share dividend payout since FY07 and we expect this trend to continue, given its resilient business and stable free cash flows. The stock price has also fallen by about 11% since end Oct last year compared to the STI’s 7.5% drop. Given the current upside potential of 21.9% along with a forecasted dividend yield of 6.7%, we upgrade our rating to BUY with an FCFE-derived fair value estimate of S$1.14 (7.28% cost of equity), which is also backed by the DDM model (2% terminal growth).

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