SingPost – CIMB
A little help goes a long way
SingPost will revise its domestic and international postage rates effective 1 Oct 2014, the first rate hike since 2006. This will help SingPost to cope with increases in labour costs, fuel prices and international settlement rates for outbound mail and partially offset its continued investments in the postal system. We raise our EPS forecasts by 3-7% to factor in the impact of the new postage rates and our DCF-based target price rises to S$1.96 (7% WACC). We keep our Add call, with the key potential catalysts being: 1) M&A opportunities, and 2) JV with Alibaba.
SingPost will revise domestic and international postage rates with effect from 1 Oct 2014. This marks the first rate hike since 2006. Domestic postage rates will increase by 4-20 S cts while international postage rates will rise by 5-25 S cts. The registered article fee for international mail will also be raised from S$2.20 to S$2.50. To help mitigate the impact of the postage rate increase, SingPost will be giving out 10m free stamps to households and charities and offer a 5% rebate to SME franked mail customers for the first year.
What We Think
SingPost has been challenged with a 25-32% rise in labour and fuel costs since its last postage rate hike in 2006 and this new rate hike will help SingPost to cope with cost pressures as mail volumes continue to decline. International settlement rates or terminal dues on outbound mail have risen by 43% due to Singapore being re-classified as a “New Target Country” by the Universal Postal Union in 2012. The rate is expected to climb another 37% by 2017, or an estimated S$35m-40m over the next 2-3 years, which we have previously factored into our forecasts. We estimate that the revised postage rates will add S$8m to revenue in 2HFY15 and S$16m (+1.3-1.6%) from FY16 onwards. On the net profit level, the impact will be more pronounced with a 6-7% upgrade to our estimates from FY16 onwards as the price increase should flow through to the bottomline. This is after accounting for the cost of the 10m free stamps in the first year.
What You Should Do
While this news is a positive, we believe the key potential catalysts for the stock are: 1) M&A opportunities in the e-commerce logistics space, and 2) a JV with Alibaba, which can bring in more e-commerce-related volumes. Our rating remains an Add.