Issues S$200m worth of notes

Issues S$200m worth of notes. Singapore Post (SingPost) is issuing S$200m in principal amount of fixed rate notes due 2020 with a coupon rate of 3.5%. With a denomination of S$250k, the notes will have a tenor of 10 years from the issue date. SingPost intends to use the net proceeds to finance new investments as part of its growth strategy. The group also expects to use part of it to fund anticipated capital expenditure and working capital requirements.

Comments on the note issue. We had previously mentioned that the group may have to replace or upgrade its mail processing system (bought in 1997-1998) by undertaking capex plans gradually. SingPost also has bonds (principal amount S$300m) maturing in Apr 2013. Given these reasons, this announcement did not take the market by surprise. In our view, it is also an opportune time to issue bonds now when interest rates are still low. As these are fixed rate notes, future increases in interest rates will not affect the group's interest expense.

Strong operating cash flows. SingPost's annual operating cash inflow has historically been substantial (average of S$164m each year from FY06- FY09). Standard & Poor's has also affirmed its AA- long-term corporate credit rating and axAAA ASEAN regional scale rating on SingPost, reflecting the group's "very strong market position in its core domestic and international mail business, high operating efficiency, and solid cash flow measures". Though S&P has revised the rating outlook to "negative" from "stable", this merely means that the long-term credit rating may be lowered, and is not necessarily a precursor of a rating change. Reasons cited were 1) weaker credit protection metrics for the next two years and 2) uncertainty over outcome of M&A activities. We note that even if the rating is lowered to A+, SingPost is still rated as "investment grade".

Broad-based recovery drives industry. Deutsche Post's CEO, Frank Appel, is "optimistic about the future, even though many uncertainties remain…"1 Led by strong Asian export volumes, FedEx recently reported an 18% jump in volume in its International Prority business2 , reflecting the region's recovery. With a broadening of the global economic recovery, arguably led by Asia, SingPost's plans to expand its reach in the region should yield positive results, if properly implemented. With the above reasons and more, we maintain our BUY rating on the stock with fair value estimate of S$1.16, giving a total return of about 12% (includes 5.8% expected dividend yield).

SingPost issuing $200m notes

Due 2020 and in $250,000 units, they will pay interest of 3.5% per annum

SINGAPORE Post plans to issue $200 million of fixed-rate notes, partly to capitalise on investment opportunities.

The notes, due 2020 and denominated in $250,000 units, will be cleared through the Central Depository, SingPost said yesterday. They will pay interest of 3.5 per cent per annum, semi-annually. The expected issue date is March 30.

‘As part of our growth strategy, we have been exploring investment and business opportunities in Singapore and the region,’ said SingPost’s deputy group chief executive and covering CEO Ng Hin Lee. ‘The notes provide us with ready financial capacity to fund any investment opportunities that may arise.’

Net proceeds from the issue will also be used for capital expenditure and working capital requirements.

DBS Bank and UBS have been appointed joint lead managers for the notes, which have been rated AA- by Standard & Poor’s.

S&P has also affirmed its AA- long-term corporate credit rating on SingPost – but revised its rating outlook from stable to negative.

‘We revised the outlook to negative to reflect SingPost’s weaker credit protection metrics for the next two years and uncertainty over the outcome of the company’s M&A activities,’ said S&P credit analyst Andrew Wong.

SingPost’s efforts to boost shareholder returns by venturing into more competitive, lower-margin businesses such as hybrid mail and logistics may result in the company taking longer than expected to repair its credit metrics, Mr Wong said.

SingPost’s move is the latest in a string of note issues.

Recently, Temasek Holdings sold $1 billion of notes due 2020, as part of its US$10 billion guaranteed global medium-term note programme.

In February, Singapore Press Holdings said that it was issuing $300 million of fixed-rate notes due 2015 as the first part of a new $1 billion multi-currency, medium-term note programme.

And in January, Sembcorp Marine quadrupled its multi-currency programme from $500 million to $2 billion.

Doing Things

• Sing Post is raising $200 mln via a 10-year fixed rate note issue, to finance "new investments, anticipated capital expenditure and working capital requirements".

• Sing Post's existing 3.13% bonds ($302.91 mln outstanding at end Dec '09) are not due to mature till April 2013.

• The new note issue will raise total borrowings to $502.9 mln, against current Shareholders Funds of $275.52 mln. Cash at end '09 was $148.56 mln.

• Sing Post is expected to release results for ye Mar '10 in late April (on the 30th last year).

COMMENTS

1. We expect the latest development to revive speculation of Sing Post selling the Post Centre at Eunos, and making a special payout.

2. Local press had in July '08 reported that Post Centre was put up for sale at asking price of $850 mln, which would have worked out to 44 cents per Sing Post share. The company announced the termination of the sale negotiations in Apr '09.

3. Fact of the matter is, there is no urgency to sell Post Centre, given Sing Post has done much with it, as seen in the 27% increase in rental and property related income to $30.21 mln in the first nine months of FY 09/10. Revenue from the core business was $391.67 mln.

4. In any case, taking on more debt will not pose a problem, given the strong operating cash flow of in excess of $200 mln a year.

5. We have been recommending BUY, largely because of the attractive utility-type 5.8% yield. (Sing Post has been paying 6.25 cents a share for at least the last 3 fiscal years, comprising quarterly rate of 1.25 cents, and final f 2.5 cents.)