SingPost – Kim Eng

Look for higher yield elsewhere

Downgrade to HOLD. SingPost’s share price has increased by 8% in the past three months and is now close to our target price. Dividends yield has been compressed to 5.8%, below its 5-year average of 6%. We continue to believe that SingPost’s transformation efforts will benefit the company in the long term, but fail to see any short-term catalyst to boost its current price further. We maintain our target price of SGD1.10 but downgrade the stock to HOLD due to its limited upside.

Transformation impacts only the top line. We appreciate Singapore Post’s transformation effort. In recent quarters, we have started to see some positive momentum in revenue thanks to the investments that SingPost has made during the past few years. However, cost pressure is keeping bottom-line growth subdued. We expect the company’s net profit to remain on a downward trend for at least the rest of FY13.

Asset divestment is unlikely. The post offices island-wide are precious assets. However, our understanding is that SingPost does not have an incentive to monetise those assets anytime soon given its substantial net cash balance of SGD161.4m.

Wait for a better entry point. SingPost is trading at FY3/13 dividend yield of 5.8%, which is no longer attractive relative to its historical band. We recommend that investors take profit and wait for a better entry point. The near-term catalyst for this stock would be to use its cash pile to make some sizeable investments in order to speed up its transformation process.

Downside protected by dividends. SingPost has committed to paying a minimum dividend of 5 cents/share p.a.. However, we believe the group’s operating cash flow generation and recent fund raising can help maintain its dividend track record of 6.25 cents/share, which would support the share price at current level.

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