SingPost – DBSV
Slow & steady transformation
• Underlying net profits of S$36.6m above estimates; 1.25Scts DPS in line
• Operating costs still rising faster than revenues
• Business transformation is underway but earnings turnaround could take a while
• Maintain HOLD for 6% yield; TP S$1.04
Decent start to the year. 1Q13 underlying net profits of S$36.6m (down 2% y-o-y) came in higher than our estimate of S$33m, on the back of a 6.5% y-o-y growth in revenues to S$151.6m. Domestic mail business was down again, but this was offset by higher growth in international mail and hybrid mail businesses, with contribution from Novation Solutions, acquired in May 2012. Revenues of both the Logistics and Retail divisions grew at a faster clip of about 12% y-o-y. Operating expenses were up 9% y-o-y, and continued to outpace revenue growth owing to developmental expenditure (upgrading talent, IT, operations). On a q-o-q basis, though, operating costs were down 3%, likely owing to more control over non-strategic costs.
More acquisitions in the cards? In March 2012, SingPost had issued S$350m of perpetual bonds at 4.25% coupon. This could be in anticipation of acquisition plans and the expiry of S$300m worth of bonds in April 2013. We would like to highlight that these perpetual bonds are accounted for as equity in our model.
6% yield appears safe to us. As expected, 1.25 Scts of interim dividend was declared for 1Q, as cash flow remained healthy. With free cash flow expected to exceed earnings and dividend commitments, FY13 DPS of 6.25 Scts looks safe in our view. Though transformation efforts are underway, and investments in growth areas like e-commerce could bear fruit in the long term, we believe that it may take two to three years before we see any real turnaround in earnings at SingPost. No change to earnings estimates for now. Our DDM-based TP remains at S$1.04 (cost of equity of 6% and terminal growth of 0%). Maintain HOLD.