Slow & steady transformation

• Underlying net profits of S$36.6m above estimates; 1.25Scts DPS in line

• Operating costs still rising faster than revenues

• Business transformation is underway but earnings turnaround could take a while

• Maintain HOLD for 6% yield; TP S$1.04

Decent start to the year. 1Q13 underlying net profits of S$36.6m (down 2% y-o-y) came in higher than our estimate of S$33m, on the back of a 6.5% y-o-y growth in revenues to S$151.6m. Domestic mail business was down again, but this was offset by higher growth in international mail and hybrid mail businesses, with contribution from Novation Solutions, acquired in May 2012. Revenues of both the Logistics and Retail divisions grew at a faster clip of about 12% y-o-y. Operating expenses were up 9% y-o-y, and continued to outpace revenue growth owing to developmental expenditure (upgrading talent, IT, operations). On a q-o-q basis, though, operating costs were down 3%, likely owing to more control over non-strategic costs.

More acquisitions in the cards? 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. We would like to highlight that these perpetual bonds are accounted for as equity in our model.

6% yield appears safe to us. As expected, 1.25 Scts of interim dividend was declared for 1Q, as cash flow remained healthy. With free cash flow expected to exceed earnings and dividend commitments, FY13 DPS of 6.25 Scts looks safe in our view. Though transformation efforts are underway, and investments in growth areas like e-commerce could bear fruit in the long term, we believe that it may take two to three years before we see any real turnaround in earnings at SingPost. No change to earnings estimates for now. Our DDM-based TP remains at S$1.04 (cost of equity of 6% and terminal growth of 0%). Maintain HOLD.

GOOD 1QFY13 SHOWING

•Good quarterly showing

•Strong financial position

•Seeking acquisition opportunities

1QFY13 results in line with our expectations

Singapore Post (SingPost) reported a 6.5% YoY rise in revenue to S$151.6m but saw a 2.9% fall in net profit to S$38.1m in 1QFY13. Results were in line with our expectations, with net profit accounting for 26.5% of our full year estimates vs 28.1% of the street’s estimate (Bloomberg consensus: S$135.6m). Group operating margin fell from 35.4% in 1QFY12 to 32.2% in 1QFY13 with lower margins in the mail division due to higher business costs and changing product mix.

Higher revenue in most divisions

Mail revenue increased 3.7% to S$100.9m as growth in packages and consolidation of Novation Solutions (acquired in May 2012) offset a slight decline in domestic mail. Logistics revenue rose 11.5% to S$57.1m, driven by higher contributions from e-fulfilment activities in Quantium Solutions and Speedpost. Meanwhile, retail revenue also increased, but rental and property-related income fell by 3.1% due to lower rental income.

Strong financial position

Interest coverage (EBITDA/Interest expense) remained strong at 18.1x in Jun 2012. Operating cash flow was also healthy with a net inflow of S$51.3m in the quarter. SingPost remained in a net cash position of S$161.4m pending the use of funds raised earlier for investment opportunities. According to management, the group continues to explore acquisition opportunities to accelerate its transformation (e.g. new revenue contributors in the digital services and e-commerce businesses, and growth in regional logistics and efulfilment).

Consistent dividends prized in an uncertain environment

Amidst the uncertain environment for investors, we believe that the defensiveness of SingPost’s businesses and its consistently decent dividends translates to a favourable risk-reward ratio for equity investors. In line with its usual practice, SingPost has declared an interim dividend of 1.25 S cents per share, which will be paid on 31 Aug 2012. Maintain BUY with S$1.14 fair value estimate.