SingPost – DBSV

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.

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