SingPost – DBSV

6.4% yield amid business transformation

At a Glance

3Q12 underlying profit of S$38.9m (-5% y-o-y, +18% q-o-q) exceeded our S$35m estimate due to lower labor costs; interim DPS of 1.25 Scts in line

One-off write back of S$1.2m and lower bonus provision led to reduction in labor expenses

Maintain HOLD for healthy 6.4% yield while the underlying business undergoes a transformation

Lower labor expenses in a seasonally strong quarter. Group revenue was up 6% q-o-q on the back of growth in mail and logistics segments. However, operating cost rose at a much slower pace at only 2.5% q-o-q as labor costs of S$44.5m declined 4%. This was due to a one-off write back of S$1.2m due to negotiation with the union and lower provision for staff bonuses. There was also S$1.1m of mark-to-market gains from equity-linked notes, which is excluded from underlying net profit.

Associate income also improved. Share of profit of associated companies amounted to S$1m, compared to a gain of S$0.1m in 2Q12 and loss of S$0.2m in 3Q11. This was due to the inclusion of contribution from recent investments: GD Express Carrier Berhad (GDEX), Efficient E-Solutions Berhad, Shenzhen 4PX Express Co Ltd (4PX) and Indo Trans Logistics Corporation (ITL).

Management wary of cost pressures. The company is in the middle of a multiyear transformation as it is trying to diversify into “digital services” and “e-commerce fulfillment” businesses. Quantium Solutions is the regional platform for expansion of these businesses in Asia. Management does not rule out cost pressures from investments in technology, people and operations.

Maintain HOLD. We raise our FY12F EPS by 2% but FY13F EPS is trimmed slightly. Our TP is trimmed to S$1.04 (cost of equity: 6%) as we assume terminal growth rate of 0% (1% previously).

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