Expenses raise their ugly heads

Story: Underlying net profit of S$33.6m (-1.2% y-o-y, -8.0% q-o-q) was below our S$35m forecast as 13% y-o-y increase in operating expenses (excluding impairment charge of S$4.9m) was above our already high single digit growth estimate. The company declared final dividend of 2.5 cents taking full year dividends to 6.25 cents.

Point: Operating expenses grew mainly due to (1) rising wages (2) higher traffic volume coupled with higher oil price and (3) higher selling expenses for boosting retail sales. Management has guided for stabilisation of operating costs at 4Q08 levels, which means that 1Q09F and 2Q09F could be hit by high cost base compared to the corresponding quarters in FY08. Moreover, postal liberalisation, although not very significant, can put additional pressure on Singpost’s margins.

Relevance: We have trimmed our FY09 earnings estimates by 6.5% on lower margin assumptions. In view of an uncertain property market, sum-of-the-parts valuation based on assumed sale of SPC building, may be less relevant now. Our new target price of S$1.12 is pegged at 15x FY09 PER (based on historical range of 15-18x) and we downgrade Singpost to HOLD. Stable earnings with 5.5% dividend yield remain as key attraction of the stock.

Update on potential building sale and acquisition. The area around Singpost building was identified as a sub-regional centre in 2007. Singapore Government is expected to unveil its Master Plan for 2008 in the next few months and. depending on the details; SPC building could become more valuable, subject to the property market valuations. We still think Singpost can unlock value out of SPC‘s sale and proceeds could be used for acquisition and special dividends. However, potential acquisition (management highlighted esubstitution as an area of interest) and potential relocation of operations from SPC building are still some of the unknown variables in the equation.

SingPost Q4 net drops 10.6% to $34.5m

But full-year net earnings rise 6.8% to $149.3m

SINGAPORE Post posted a 10.6 per cent year-on-year fall in net profit to $34.5 million for the fourth quarter despite a 5.7 per cent rise in revenue to $119 million.

But for the full year ended March 31, net profit climbed 6.8 per cent to $149.3 million, with revenue up 8.4 per cent at $472.6 million. Q4 earnings per share fell to 1.793 cents from 2.014 cents.

What caused the Q4 fall in net profit was an 18.4 per cent or about $14.5 million jump in total expenses to almost $93 million. Besides the higher costs of labour, goods and administrative expenses, the period included a one-off impairment charge of $4.9 million for two properties.

The increase in full-year revenue was due to all business segments showing improvement.

Full-year mail revenue grew by 7.9 per cent to $365.3 million, underpinned by higher mail volumes and price adjustments.

Logistics revenue rose by 6.7 per cent to $68.6 million due to higher contributions from Speedpost, vPOST online shopping and shipping transactions, and warehousing, fulfilment and distribution.

Retail recorded a 10.8 per cent increase in revenue to $61.6 million, as increased contributions from financial services and retail products offset the decline in agency and bill presentment services.

Said Wilson Tan, SingPost’s group chief executive officer: ‘We will focus on enhancing productivity and efficiency to better support our business growth. Barring any significant changes, we expect operating costs to stabilise.’

SingPost has proposed a final dividend of 2.5 cents per share (tax exempt one-tier), unchanged from the previous Q4. This is to be paid on July 18.

Together with the interim dividends of 1.25 cents paid out for each of the first three quarters, the total dividend for the year will total 6.25 cents per share.

As part of its efforts to cater to consumers’ needs, SingPost is looking into expanding its services and reach.

DMrocket, a one-stop direct mail centre, was launched during the year. SingPost also expanded its hybrid mail business into Hong Kong and Thailand.

It also launched two new remittance services – Visa money Transfer and Cashome to Indonesia and an investment fund with Prudential Asset Management.

Despite the fall in Q4 net profit, SingPost remains upbeat about its outlook.

‘We will continue to implement strategies to drive revenue in our core business of mail and logistics and also continue to leverage on our retail network. We are re-purposing our post offices to reap better yield,’ said Mr Tan.

‘We believe the group is positioned to tackle the challenges ahead and also on track for continued growth.’

SingPost shares closed 0.9 per cent higher at $1.16 yesterday.