Look for higher yield elsewhere

Downgrade to HOLD. SingPost’s share price has increased by 8% in the past three months and is now close to our target price. Dividends yield has been compressed to 5.8%, below its 5-year average of 6%. We continue to believe that SingPost’s transformation efforts will benefit the company in the long term, but fail to see any short-term catalyst to boost its current price further. We maintain our target price of SGD1.10 but downgrade the stock to HOLD due to its limited upside.

Transformation impacts only the top line. We appreciate Singapore Post’s transformation effort. In recent quarters, we have started to see some positive momentum in revenue thanks to the investments that SingPost has made during the past few years. However, cost pressure is keeping bottom-line growth subdued. We expect the company’s net profit to remain on a downward trend for at least the rest of FY13.

Asset divestment is unlikely. The post offices island-wide are precious assets. However, our understanding is that SingPost does not have an incentive to monetise those assets anytime soon given its substantial net cash balance of SGD161.4m.

Wait for a better entry point. SingPost is trading at FY3/13 dividend yield of 5.8%, which is no longer attractive relative to its historical band. We recommend that investors take profit and wait for a better entry point. The near-term catalyst for this stock would be to use its cash pile to make some sizeable investments in order to speed up its transformation process.

Downside protected by dividends. SingPost has committed to paying a minimum dividend of 5 cents/share p.a.. However, we believe the group’s operating cash flow generation and recent fund raising can help maintain its dividend track record of 6.25 cents/share, which would support the share price at current level.

PROPERTY SPIN-OFF A BONUS; BUY FOR DEFENSIVENESS

• Recent listings highlight buoyant mood
  
• May be an opportune time
• But group is cash rich

Property spinoffs gathering pace, though mainly hospitality

With current high property prices in Singapore, an increasing number of companies have listed their property assets due to favourable valuations, though these have been mostly limited to hospitality assets so far this year.

SingPost is rich

Besides having a dominant presence in Singapore’s mail and logistics business which generates stable cash flows, SingPost also has a property portfolio that may bring in substantial cash when unlocked. The group has about 61 post offices and around half are owned by SingPost; about 14 of these are restricted in usage, leaving 16 or so potentially saleable. However, the jewel in its portfolio is the Singapore Post Centre (SPC) which is conveniently located near Paya Lebar MRT. We estimate that the SPC is worth S$765m based on its current mix of industrial, office and retail use, but the value may increase to about S$1.56b if the building is converted to full commercial use.

May be an opportune time, but no rush for group

The buoyant mood in Singapore’s property sector means that this could be an opportune time for SingPost to spin off some of its assets. The group may even receive an offer that is hard to resist. However, putting market sentiment aside, the group may not be in a rush to unlock value as it is currently cash-rich after issuing perpetual capital securities. The divestment of property would also result in a loss of rental income.

Spin-off a bonus; buy for its defensiveness

On a more fundamental level, we like the group for its stable operating cash flows given its non-cyclical business. Its consistent dividends (yield ~5.9%), strong balance sheet and dominant market position in its home country render it an attractive stock during an uncertain climate. Maintain BUY with our DDM-derived fair value estimate of S$1.14.

PROPERTY SPIN-OFF A BONUS; BUY FOR DEFENSIVENESS

• Recent listings highlight buoyant mood
  
• May be an opportune time
• But group is cash rich

Property spinoffs gathering pace, though mainly hospitality

With current high property prices in Singapore, an increasing number of companies have listed their property assets due to favourable valuations, though these have been mostly limited to hospitality assets so far this year.

SingPost is rich

Besides having a dominant presence in Singapore’s mail and logistics business which generates stable cash flows, SingPost also has a property portfolio that may bring in substantial cash when unlocked. The group has about 61 post offices and around half are owned by SingPost; about 14 of these are restricted in usage, leaving 16 or so potentially saleable. However, the jewel in its portfolio is the Singapore Post Centre (SPC) which is conveniently located near Paya Lebar MRT. We estimate that the SPC is worth S$765m based on its current mix of industrial, office and retail use, but the value may increase to about S$1.56b if the building is converted to full commercial use.

May be an opportune time, but no rush for group

The buoyant mood in Singapore’s property sector means that this could be an opportune time for SingPost to spin off some of its assets. The group may even receive an offer that is hard to resist. However, putting market sentiment aside, the group may not be in a rush to unlock value as it is currently cash-rich after issuing perpetual capital securities. The divestment of property would also result in a loss of rental income.

Spin-off a bonus; buy for its defensiveness

On a more fundamental level, we like the group for its stable operating cash flows given its non-cyclical business. Its consistent dividends (yield ~5.9%), strong balance sheet and dominant market position in its home country render it an attractive stock during an uncertain climate. Maintain BUY with our DDM-derived fair value estimate of S$1.14.

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.

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.