Look at better yield alternatives

• 2Q13 underlying profit of S$32.7m (-0.3% y-o-y, -10% q-o-q) and interim DPS of 1.25 Scts were in line

• Overseas business contribution rose to 18% in 2Q13 versus 15% in 1Q13 and 13% in 2Q12, driven by acquisitions where viability has not been proven yet

• HOLD as ~5.4% yield is comparable to the yields offered by Singapore telcos who also offer superior growth

Highlights

Costs continue to outpace revenue growth. Operating expenses grew 13% y-o-y outpacing 9% rise in revenues. This was due to inflationary cost pressures and investments in capabilities and resources to expand overseas revenue. We highlight that most of the top line growth can be attributed to acquisitions worth over S$75m done over the last two years. More acquisitions cannot be ruled out. 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. These perpetual bonds are accounted for as equity in our model.

Our View

6.25 Scts DPS is safe in our view. Dividend payout ratio translates to ~90% while future acquisitions can be funded by S$350m of perpetual bonds. However, we don’t think Singpost will hike its payout ratio till it emerges out of its acquisition mode.

The big questions is how viable are these acquisitions? The good part is that Singpost has not put all its eggs in one basket and has bought stakes in about eight small companies in various geographies. However, one key issue, in our view, is that Singpost does not have a controlling stake in some of these companies and the mix may be too widespread. This may leave Singpost at the mercy of local managements of these companies.

Recommendation

HOLD for 5.4% yield. Overall, we think that acquisitions will start to contribute positively to earnings in another 12 months or so. But that could be offset by decline in the domestic mail business. The stock is not cheap at ~17x PE and ~5.4% yield is not too attractive either unless the company can demonstrate some growth potential.

Look at better yield alternatives

• 2Q13 underlying profit of S$32.7m (-0.3% y-o-y, -10% q-o-q) and interim DPS of 1.25 Scts were in line

• Overseas business contribution rose to 18% in 2Q13 versus 15% in 1Q13 and 13% in 2Q12, driven by acquisitions where viability has not been proven yet

• HOLD as ~5.4% yield is comparable to the yields offered by Singapore telcos who also offer superior growth

Highlights

Costs continue to outpace revenue growth. Operating expenses grew 13% y-o-y outpacing 9% rise in revenues. This was due to inflationary cost pressures and investments in capabilities and resources to expand overseas revenue. We highlight that most of the top line growth can be attributed to acquisitions worth over S$75m done over the last two years. More acquisitions cannot be ruled out. 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. These perpetual bonds are accounted for as equity in our model.

Our View

6.25 Scts DPS is safe in our view. Dividend payout ratio translates to ~90% while future acquisitions can be funded by S$350m of perpetual bonds. However, we don’t think Singpost will hike its payout ratio till it emerges out of its acquisition mode.

The big questions is how viable are these acquisitions? The good part is that Singpost has not put all its eggs in one basket and has bought stakes in about eight small companies in various geographies. However, one key issue, in our view, is that Singpost does not have a controlling stake in some of these companies and the mix may be too widespread. This may leave Singpost at the mercy of local managements of these companies.

Recommendation

HOLD for 5.4% yield. Overall, we think that acquisitions will start to contribute positively to earnings in another 12 months or so. But that could be offset by decline in the domestic mail business. The stock is not cheap at ~17x PE and ~5.4% yield is not too attractive either unless the company can demonstrate some growth potential.

Wait For A Better Entry Point

Decent results as expected. Singapore Post announced its 2QFY3/13 results yesterday morning. The results were in line with consensus and our estimates. 1HFY3/13 revenue increased by 7.8% yoy to SGD305m, representing 50.6% of our full-year forecast and net profit excluding one-off items was slightly down by 0.6% to SGD69m. We maintain our HOLD rating and target price of SGD1.10 unchanged as we think the upside is very limited after recent strong share price performance.

Transformation only improves the top line. We appreciate Singapore Post’s transformation effort as we saw positive revenue growth momentum in recent quarters. In the first half of FY3/13, SingPost recognized revenue growth in all business segments (Mail sector up 8.0% yoy; Logistics sector up 7.8% yoy and Retail sector up 8.7% yoy) despite the continuous decline in letter volumes. The growth was mainly driven by consolidation of new acquired subsidiary Novation Solutions as well as the revenue growth in Quantium Solutions and Speedpost.

Still too early to see significant bottom line improvement. Despite respectable top line growth, net profit failed to make any growth (down by 0.6% yoy) in 1HFY3/13 compared with a year ago. In our view, we are not likely to see significant bottom line growth in short to medium term because of inflationary cost pressure and gradual shift to lower margin Logistics business.

Property assets divestment? SingPost’s post offices island-wide are precious assets to shareholders. Although the management is open to listening to any offer, we don’t think it will sell their property assets given SingPost’s big net cash position unless the price is too good to say no. However we will appreciate such divestment practice to unlock the hidden value to shareholders.

Wait for a better entry point. SingPost is more of a yield play. However its current dividends yield of 5.4% is no longer attractive relative to its historical average of 6.0%. We recommend that investors take profit and wait for a better entry point.