Control at the helm induces confidence

Results in line with expectations. Singapore Post (SingPost) reported a 0.7% YoY rise in revenue to S$121.8m and a 0.1% YoY fall in net profit to S$39.4m for 1Q10, accounting for 25% and 27% of our full-year estimates respectively. Mail revenue was 7.2% lower with a decline in mail volumes while logistics revenue rose due to a consolidation with G3 Worldwide Aspac (G3AP) after the acquisition in May. Rental and property-related income improved with higher rental income from the Singapore Post Centre (SPC) and leasing of space at re-purposed post office buildings. SingPost is definitely feeling the impact of the economic downturn but has taken steps to preserve and even grow the business.

Two M&A deals in 1Q10. SingPost acquired the remaining 50% stake in G3AP in exchange for its 24.5% interest in G3 Worldwide Mail and cash payment of 7.5m euros. The group also announced in May that it will invest in Postea, Inc which will help it further develop its own intellectual property. It is good to know that SingPost has taken the opportunity to invest during a time when many other cash-strapped companies can only stand by as onlookers. It is also worth noting that SingPost has substantial cash of S$184.9m as at 31 Jun 09.

Focus on cost control and growth at the same time. There will be a terminal dues hike in 2010 which will impact SingPost from a cost standpoint. The Company plans to put in place strategies that will mitigate the increase in costs such as streamlining efficiency in mail traffic moving out of Singapore (in terms of weight and volume). Bilateral agreements with other postal companies may be explored as well. Meanwhile, G3AP’s wider footprint means there are more options to move mail internationally through this system.

Maintain BUY. While impacted by the global slowdown, SingPost’s business remains relatively resilient compared to most other companies. We are keeping our estimates until we see more robust signs of recovery. The group will be paying an interim dividend of S$0.0125/share, consistent with its dividend policy. We have raised our fair value estimate for SingPost to S$0.97 as we adopt a lower cost of equity (8.4% compared to 8.8% previously) following reduced risk aversion in the market. Maintain BUY.

G3AP contribution offset lower mail revenue

• In line. 1Q10 earnings of S$39.4m (-0.1% yoy) are in line with consensus and our estimates, accounting for 27% of our full-year estimate. Revenue grew 0.7% yoy to S$121.8m despite a poor economic environment, thanks to contributions from G3 Worldwide Aspac Pte Ltd (G3AP). 1Q10 dividend was 1.25cts/share.

• G3AP boosted logistics revenue. Mail revenue fell 7.2% yoy on declines in domestic and international mail, slightly offset by higher hybrid mail and philatelic. Logistics revenue growth of 90.7% was attributed to higher warehousing, fulfilment, distribution and the inclusion of G3AP revenue for the first time, offset by lower Speedpost revenue. Retail revenue was flat yoy. Rental and property-related income went up 38.4%, thanks to higher rental income from Singapore Post Centre (SPC) and the leasing of space at repurposed post office buildings. Operating expenses rose 5.5%, because of the consolidation of G3AP.

• Sale of SPC not in sight. During last evening’s conference call, management said that SingPost is not looking to divest SPC for now. It will continue to explore opportunities to enhance the building’s value. Occupancy rate is around 97.9% with around 50% of its net lettable area leased to third parties.

• Outlook. SingPost will continue to focus on direct mail expansion. We believe that more acquisitions could be in the pipeline (so far it has acquired G3AP and Postea). The dividend policy of a minimum 5cts/share remains.

• Maintain Neutral; we have increased DPS assumptions given an improving macro outlook. Correspondingly, our DDM-derived target price (discount rate
8.5%) has been raised to S$0.88 from $0.80. Although dividend yields are attractive at 7%, we remain Neutral on the stock due to limited upside to its share price. No change to our earnings estimates.