What does postal hike mean?

• Received approval for 12-30% rate hike across domestic and international mail from 1st Oct 14; first hike in 8 years to mitigate cost increase
  
• Annual revenue to improve S$12m-16m but most of it will flow to the bottom line; our FY15F/16F EPS raised 3%/5% conservatively
  
• Maintain BUY with revised DCF based (WACC 6.3%, terminal rate 2%) TP of S$2.12. Offers potential return of 25%
  

Rate hike in response to declining domestic mail volume and rising costs. Since 2008, according to SPOST, labor, and fuel costs have gone up ~30% each, inflation has risen 26% while terminal dues for international mail have risen 43% and will further rise 37% by 2017. About 60% of the domestic mail and ~30% of international outgoing mail is still regulated across which SPOST has raised postal rates by 12-30%, in our estimates.

The hike will be effective from 1st Oct 2014 and SPOST will absorb the cost increase for SMEs in the first year. Based on last year volume, SPOST believes that annual revenue impact could be ~S$16m, however, the actual impact may be ~S$12m due to rebates to SMEs in the first year. Given that mail segment is a high margin business, this should translate into 3%/5% higher FY15F/16F EPS conservatively.

SPOST should command premium valuation for three reasons. Assuming that SPOST makes S$300m worth of acquisitions at 12-15x PER, it may add S$20-25m or 15-20% to our FY16F earnings. Secondly, SPOST is incurring ~S$15m developmental expenses each year, mainly in hiring and training people which could continue for another 2-3 years. We expect SPOST to register healthy growth beyond that. Lastly, higher e-commerce volumes could surprise in FY16F as we have assumed only ~S$50m worth of business from its Chinese e-commerce partner in our forecasts.

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.

What Happened

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.