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.

IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED

•Changes in QoS framework

•Do not foresee an impact

•Seeks growth on back of stable mail business

Revised Quality of Service Framework

The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.

How will this impact SingPost?

The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.

Expanding other divisions while being true to the core

A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.

IMPACT FROM REVISED QoS FRAMEWORK LIKELY LIMITED

•Changes in QoS framework

•Do not foresee an impact

•Seeks growth on back of stable mail business

Revised Quality of Service Framework

The Infocomm Development Authority of Singapore (IDA) has revised the Quality of Service (QoS) framework for postal services. A key change is the increase in financial penalty for breach of the standards – a penalty of up to S$50,000/month per indicator may be imposed for non-compliance. This compares with the current penalty of S$1,000- S$5,000/month per indicator. The second key change is the requirement for SingPost to appoint an independent assessor to conduct a sampling letter test.

How will this impact SingPost?

The revised framework will be applicable to Singapore Post’s (SingPost) basic letter delivery service (effective 1 Jul 2012), and does not apply to parcel deliveries. According to statistics collected by SingPost in recent years, the group has been delivering over and above IDA’s requirements. Should this trend continue, we do not foresee an impact from the increase in penalty. Meanwhile, SingPost’s compliance with IDA’s QoS framework is currently measured via a sampling letter test that is carried out by SingPost itself. Under the new framework, SingPost has to appoint an independent assessor to conduct the sampling letter test at SingPost’s cost as an additional method of measuring compliance.

Expanding other divisions while being true to the core

A structural decline in the mail business due to e-substitution and lifestyle changes has affected personal correspondence and business transactional mail. However, growth in direct marketing mail has been observed, supporting mail volumes. We appreciate SingPost’s dominant domestic market position, operating efficiency, and stable operating cash flows. We are also mindful of margin pressures as well as the relatively limited growth opportunities in the core mail business. However, the group is seeking geographical and business expansion in logistics and retail, with continued investments in its core mail business. Maintain BUY with S$1.14 fair value estimate.

Parcel Is the New Mail

All the right moves, reiterate BUY. As its restructuring continues, we believe that SingPost is making all the right moves to fend off the negative impact from the sustained decline in global physical mail volume. Our visit to the company last week reaffirmed our view that investors stand to benefit in the long term from its transformation while being protected in the short-to-medium term by its stable dividend payout. We reiterate our BUY call with a target price of SGD1.10 based on 5.7% yield, the average of the top 15 dividend yield stocks in the Maybank Kim Eng coverage universe.

Five pillars, over 20 initiatives. In the face of dwindling global mail volume, newly-minted CEO Dr Wolfgang Baier has introduced the “five pillars” concept, which encompasses over 20 initiatives, in his bid to move SingPost to a new business model. At the core of the strategy is diversification both geographically and product-wise. In our view, the parcel business has a better chance of taking off first, as the investments in Quantium and vPOST are starting to pay off.

Large-scale acquisitions this year or next to surprise the market. SingPost currently sits on a cash balance of SGD617m after the issue of perpetual securities worth SGD350m in Mar 2012. The market has been slightly disappointed that its acquisitions since 2009 have all been small in scale. But it is possible that SingPost would spring a surprise this year – or next – with some large-scale acquisitions.

More cost efficient than peers. While cost pressure will persist in the next few years, we believe that SingPost is one of the most cost-efficient postal organisations among its peers, thanks to its investments in automation and geographical divestment.

Sufficient cash flow to support dividend payout. SingPost has committed to a minimum dividend payout of SGD5cents per share pa. However, based on its operating cash flow generation and recent fund-raising, we believe that it is well able to maintain its track record of SGD6.25cents per share.

DIVIDENDS LIKELY TO REMAIN INTACT DESPITE TRANSFORMATION

•Results largely in line

•In midst of transformation

•Declares 2.5 S cents final dividend

FY12 results largely within expectations

Singapore Post (SingPost) reported a 2.2% rise in revenue to S$578.5m but saw an 11.8% fall in net profit to S$142.0m in FY12, accounting for 101% and 95% of our full-year estimates, respectively. Administrative and other expenses, which increased 12.5% YoY and 4.2% QoQ in 4QFY12, were slightly higher than expected. On a segmental breakdown, the logistics and retail divisions posted improved revenues in 4QFY12, while mail turnover remained steady as growth in international mail and philatelic revenue offset the decline in domestic and hybrid mail contributions.

Dividends should remain intact

Besides acquiring stakes in companies to grow its businesses, SingPost invested S$9.7m in the upgrading of talent, IT systems and processes in FY12. The group is pursuing a transformation programme for its future but we do not see this impacting the group’s dividend payouts. We note that SingPost’s free cashflow payout ratio has been in the comfortable range of 60-80% since FY07, and are forecasting a 78.6% ratio for FY13F, based on an expected full-year dividend of 6.25 S cents.

Financial impact of perpetual securities

SingPost’s perpetual securities will be classified as equity for accounting purposes, but we understand it will be treated as debt from a tax perspective. The perps should not result in higher interest expense in the income statement, as the preferred dividends are paid post-tax. If, however, some of the proceeds are used to pay off debt, interest expense may even be lower. Meanwhile, the group’s gearing will be lower from a bank’s perspective.

Maintain BUY

Similar to last year, SingPost has declared a final dividend of 2.5 S cents per share, bringing the total dividend for the year to 6.25 S cents. The stock price has risen by about 9.0% since we upgraded it from Hold on 5 Jan, but we still see an upside potential of 17.3% (inclusive of a forecasted dividend yield of 6.1%) based on our DDMderived fair value estimate of S$1.14. Maintain BUY.