Marvellous makeover

What’s New

• Singapore Post (SingPost) has demonstrated earnings resilience in the face of structural changes in the global mail industry. Its efforts to diversify into the non‐mail business since its listing in 2003 have paid off with the segment contributing 31% to operating profit in FY Mar11 from 15% in FY Mar05. The stock currently trades at a premium over its peers, given its superior ROE and steady free cash flow that exceeds its dividend

commitment. We upgrade our rating to BUY from HOLD with a target price of $1.18 (total return of 19%).

Our View

• SingPost has made strategic investments in logistics companies in Malaysia, China and Vietnam this year. In the second half of the year, it will launch a digital mailbox service, VBox, to engage customers in the digital space. Initiatives like these are helping the group to mitigate the general trend of mail volume decline.

• SingPost has a strong cash balance of $345.4m as at June 2011. Its six acquisitions year‐to‐date have used up only about $63m out of the $200m raised in March last year. With net gearing at a comfortable 50% level and no near‐term refinancing needs, it means Dr Wolfgang Baier, the newly appointed CEO for international operations, will have greater flexibility to carry out the group’s regionalisation and diversification plans.

• The withdrawal of Capital Group as a substantial shareholder last month caused SingPost to grapple with a slight share overhang. However, the group’s buyback of 33.2m shares since June has provided firm support.

Action & Recommendation

Our target price of $1.18 is pegged at the historical average PER of 14x (implied yield of 5.3%). We believe the catalysts for re‐rating would come from further cash deployment for acquisitions that would bolster longer‐term earnings growth prospects. Upgrade to BUY.

Eyeing the Chinese e-commerce market

Another step in regional expansion. Singapore Post (SingPost) recently announced that together with 4PX Worldwide Express, it will set up a joint venture called vPOST Hong Kong (vPOST HK) which will provide internet shopping, shipping, and logistics services. SingPost will invest HK$1.5m and take up a 50% stake in the JV. Recall that Quantium Solutions, a subsidiary of SingPost, had earlier invested S$11.5m for a 20% stake in Shenzhen 4PX Express which provides international express delivery services (excluding postal services), international freight forwarding, import/export of goods and technology. This is in line with SingPost’s strategy to expand its inbound and outbound logistics and ecommerce market.

China’s e-commerce market has huge growth potential. These investments give SingPost a platform for entry into the logistics and high-growth e-commerce market in countries such as China and Hong Kong. The growth potential of China is especially eye-catching (Exhibit 1); as its economy grows, more of its consumers and businesses are able to purchase goods as well as sell to other markets. According to AT Kearney, China’s e-commerce market has grown at a compound annual growth rate of 90% over the past five years to more than US$32b in 2009 and is estimated to be worth US$175b in 20141 . Factors that will drive this trend include an increase in purchasing power among residents which would drive the growth of online shoppers, and the development of greater online security.

Asia Pacific market also holds promise. The outlook for the Asia Pacific market is also bright (Exhibit 2), driven by both businesses and consumers. According to the EMS unit at the Universal Postal Union2 , manufacturers are looking for the best-priced parts and companies are increasingly ordering such products to be shipped from Asia-Pacific. Moreover, as parts get smaller and lighter, shipping products becomes an increasingly attractive option due to lower costs.

But still just a small step. SingPost is taking the right direction but the group is still in the early stages of gaining a strong foothold in the Chinese market. Pending more details on its expansion strategy, we retain our DCF-based fair value estimate of S$1.14 and maintain our HOLD rating. Meanwhile, we like the stock for its decent dividend yield of 6.0% which is backed by stable operating cash flows and a strong financial position (net gearing stands at 0.5x and EBITDA/interest coverage of 18.1x as at 30 Jun 2011); investors may want to rotate into defensive stocks such as SingPost from a tactical asset allocation point of view, amidst the market uncertainty..

Regionalization on full drive

At a Glance

• 1Q12’s underlying net profit of S$37.3m (+0.3% YoY) and interim DPS of 1.25 Scts were inline.

• Invested c.S$65m in regional acquisitions since Jan, which should more than offset the potential decline in the mail segment in the long run

• Maintain HOLD with TP of S$1.17

Comment on Results

Net underlying profit of S$37.3m was inline with our expectations. Proposed interim DPS of 1.25 Scts as expected. Group revenue was up 2.9% yoy, mainly driven by 11% growth in logistics revenue, while mail and retail segments grew by 1.6% and 1.7% respectively. However, management highlighted that mail segment has begun to face increased pressure from e-substitution recently. Operating expenses grew by a faster 7% yoy due to 12% yoy increase in labour costs but partly offset by stable depreciation & amortization expenses.

Acquiring e-commerce, e-substitution & logistics companies. Out of S$200m raised through a bond issue in March 2010, SingPost has used S$65m to acquire stakes in six regional companies. Contribution from these acquisitions is estimated to be S$2-3m in FY12F and should grow further. This may help to buffer the potential decline in the mail segment as revenue and margins come under pressure. We would like to highlight that acquired business have lower operating margins but should help to enhance Singpost’s earnings in the long run. With the remaining invested in cash and high-yield financial instruments, Singpost has the financial muscle to acquire companies. We also expect a one-time capex of S$50m-70m for the replacement or upgrade of its mail-sorting machine. The timing is not certain, as there is a possibility that it may be delayed from 2013/14.

Maintain HOLD. Our TP of S$1.17 is based on DDM (cost of equity 7.7%, growth rate 2%). We have assumed that dividends can grow by 2% p.a. in the long term.

Regionalization on full drive

At a Glance

• 1Q12’s underlying net profit of S$37.3m (+0.3% YoY) and interim DPS of 1.25 Scts were inline.

• Invested c.S$65m in regional acquisitions since Jan, which should more than offset the potential decline in the mail segment in the long run

• Maintain HOLD with TP of S$1.17

Comment on Results

Net underlying profit of S$37.3m was inline with our expectations. Proposed interim DPS of 1.25 Scts as expected. Group revenue was up 2.9% yoy, mainly driven by 11% growth in logistics revenue, while mail and retail segments grew by 1.6% and 1.7% respectively. However, management highlighted that mail segment has begun to face increased pressure from e-substitution recently. Operating expenses grew by a faster 7% yoy due to 12% yoy increase in labour costs but partly offset by stable depreciation & amortization expenses.

Acquiring e-commerce, e-substitution & logistics companies. Out of S$200m raised through a bond issue in March 2010, SingPost has used S$65m to acquire stakes in six regional companies. Contribution from these acquisitions is estimated to be S$2-3m in FY12F and should grow further. This may help to buffer the potential decline in the mail segment as revenue and margins come under pressure. We would like to highlight that acquired business have lower operating margins but should help to enhance Singpost’s earnings in the long run. With the remaining invested in cash and high-yield financial instruments, Singpost has the financial muscle to acquire companies. We also expect a one-time capex of S$50m-70m for the replacement or upgrade of its mail-sorting machine. The timing is not certain, as there is a possibility that it may be delayed from 2013/14.

Maintain HOLD. Our TP of S$1.17 is based on DDM (cost of equity 7.7%, growth rate 2%). We have assumed that dividends can grow by 2% p.a. in the long term.

SingPost Q1 profit dips 3.5% to $39.24m

Revenue goes up 3% to $142.3m for the quarter

SINGAPORE Post (SingPost) saw net profit dip 3.5 per cent to $39.24 million while revenue climbed 3 per cent to $142.3 million for the first quarter ended June 30, 2011.

Underlying net profit – which excludes one-off items – was flat at $37.37 million. Earnings per share for the quarter were 2.042 cents, compared to 2.111 cents in the corresponding quarter a year ago.

Contributions from its various business segments were mostly higher with revenue from its mail segment increasing 1.6 per cent to $97.24 million.

Logistics revenue, which grew the strongest, was up 10.7 per cent to $51.24 million. Retail revenue increased 1.5 per cent to $16.56 million due to higher retail product contributions, which offset the decline in financial services revenue after the sale of its SpeedCash business in March this year.

Rental and property-related income rose 5.1 per cent to $10.6 million while miscellaneous income increased 7.9 per cent to $4.5 million.

Meanwhile, total expenses for the group were up 6 per cent to $109.3 million. However, net cash from operating activities also came in higher at $37.7 million in Q1 FY11/12, compared to $29.1 million in the corresponding quarter last year.

The board has declared an interim quarterly dividend of 1.25 cents per ordinary share, payable on Aug 31.

‘The group continues to face formidable challenges in the postal industry arising from e-substitution, competition and rising operating costs and is accelerating efforts to diversify and grow its businesses,’ SingPost said. ‘Besides driving organic growth in Singapore and in the regional markets through Quantium Solutions, the group will continue pursuing acquisition opportunities in the Asia-Pacific region.’

Shares in SingPost closed at $1.10 yesterday, unchanged.