A faint light at the end of the tunnel

Key Meeting Takeaways

• SingPost’s pace of acquisitions appears to be picking up but so far, none of them has been game‐changing enough for the stock to pop back on the radar. However, the group is certainly following through on its strategy of entering more non‐mail markets and expanding its regional wing. The question is how big an impact will these investments have on earnings and how soon? Only less than $30m has been invested since $200m was raised early last year, and it is perhaps too early to expect tangible results. For now, we reckon its slightly above‐sector valuations have already factored in expectations of earnings‐accretive acquisitions.

Our View

• It has been a year since SingPost raised $200m in early 2010 and the crawling pace of realising its strategy of entering non‐mail businesses and expanding outside the growth‐starved domestic market is picking up slightly. It only recently purchased a 22% stake in Malaysian courier GD Express for RM45.5m, took control of hybrid mail subsidiary DataPost for S$6m and boosted its e‐commerce team for S$0.2m.

• It has also hired an ex‐McKinsey consultant, Dr Wolfgang Baier, to accelerate regionalisation and diversification. Dr Baier has international experience in logistics and is familiar with SingPost, having worked with the group while at his old company. He will take over some key functions from Deputy Group CEO Ng Hin Lee, who has also borne the group finance portfolio since ex‐CEO Wilson Tan left a year ago.

• To‐date however, none of SingPost’s investments has had tangible results as they were only acquired this year. Quantium, which was fully acquired in 2009, has not had a good year either, as profitability was lower on higher operating expenses. Ironically, the “boring” mail business (operating profit +8.5%) did better than the business it is trying to expand into. Logistics operating profit fell 5% in FY11.

A faint light at the end of the tunnel

Key Meeting Takeaways

• SingPost’s pace of acquisitions appears to be picking up but so far, none of them has been game‐changing enough for the stock to pop back on the radar. However, the group is certainly following through on its strategy of entering more non‐mail markets and expanding its regional wing. The question is how big an impact will these investments have on earnings and how soon? Only less than $30m has been invested since $200m was raised early last year, and it is perhaps too early to expect tangible results. For now, we reckon its slightly above‐sector valuations have already factored in expectations of earnings‐accretive acquisitions.

Our View

• It has been a year since SingPost raised $200m in early 2010 and the crawling pace of realising its strategy of entering non‐mail businesses and expanding outside the growth‐starved domestic market is picking up slightly. It only recently purchased a 22% stake in Malaysian courier GD Express for RM45.5m, took control of hybrid mail subsidiary DataPost for S$6m and boosted its e‐commerce team for S$0.2m.

• It has also hired an ex‐McKinsey consultant, Dr Wolfgang Baier, to accelerate regionalisation and diversification. Dr Baier has international experience in logistics and is familiar with SingPost, having worked with the group while at his old company. He will take over some key functions from Deputy Group CEO Ng Hin Lee, who has also borne the group finance portfolio since ex‐CEO Wilson Tan left a year ago.

• To‐date however, none of SingPost’s investments has had tangible results as they were only acquired this year. Quantium, which was fully acquired in 2009, has not had a good year either, as profitability was lower on higher operating expenses. Ironically, the “boring” mail business (operating profit +8.5%) did better than the business it is trying to expand into. Logistics operating profit fell 5% in FY11.

SingPost buys remaining 30% stake in DataPost

SINGAPORE Post (SingPost) is acquiring the remaining 30 per cent stake in DataPost from Oce NV for $6 million, in a move aimed at ramping up SingPost’s hybrid mail business.

Since 1994, SingPost has held a 70 per cent stake in DataPost, having invested $700,000 in the company back then. With the acquisition of the remaining 30 per cent, DataPost will be a wholly owned subsidiary of SingPost.

DataPost, which was established in 1994, provides end-to-end mailing services such as confidential data printing as well as letter shopping and enveloping to clients hailing from industries such as banking, insurance and telecommunications. DataPost has also expanded in the region and set up data printing facilities in Malaysia, Hong Kong, Thailand and the Philippines.

‘DataPost provides businesses a cost-effective, end-to-end service covering data formatting, secured printing, processing and digital archiving,’ said Ng Hin Lee, SingPost’s chief executive officer for postal and corporate services. ‘With this acquisition, SingPost will have full control of DataPost and the flexibility to further develop our hybrid mail business in the region. We will be able to better support our regional customers with a wider suite of hybrid mail solutions.’

He added that the acquisition will give SingPost another platform from which it can expand its regional business.

The group has been beefing up its presence in the region, having made several acquisitions since 2009 which include cross-border mail-logistics company Quantium Solutions and Postea Inc, a US-incorporated technology company specialising in technology solutions for the postal and logistics industries.

Shares in SingPost closed at $1.16 yesterday, up one cent.

Prioritising for the future

4QFY11 results in line with expectations. Singapore Post (SingPost) reported a 7.7% rise in revenue to S$565.5m and a 2.4% drop in net profit to S$161.0m in FY11, such that results were 0.8% and 3% shy of our estimates, respectively. However, if we were to exclude one-off items such as the amortization of deferred gain on intellectual property rights, and benefits from the Jobs Credit Scheme, underlying net profit actually rose by 1.2%. Free cash flow (net cash inflow from operating activities less capex) remained healthy at S$174.6m in FY11 compared to S$196m and S$155m in FY10 and FY09, respectively.

Decent performance from mail and logistics. The mail and logistics segments registered better performances in 4QFY11, with the former growing 4.3% YoY and the latter by 11.6%. Domestic mail traffic increased on the back of a buoyant business environment, while international mail traffic rose in tandem with the growth in e-commerce activities. Higher logistics revenue was mainly due to higher contributions from Speedpost, trans-shipment and vPOST shipping activities.

Prioritising for the future. SingPost has laid out its priorities for the future: 1) to grow regional logistics, focusing on warehousing, fulfillment and end-delivery in Asia Pacific, 2) grow the e-fulfilment business by strengthening Quantium Solutions, and 3) drive growth through e-commerce. The group is keen to grow the logistics business, and is looking at building a full suite of services in order to scale up the value chain. If executed well, this should result in higher margins compared to a company with pure logistics operations (industry is currently competitive, resulting in relatively low margins). Meanwhile, the group is also banking on the e-commerce business which holds potential for growth – Singaporeans are spending more on online shopping, purchasing from both local and overseas merchants.

Maintain HOLD. In line with the group’s usual practice, a final dividend of 2.5 S cents per share has been recommended, bringing the full year dividend to 6.25 S cents. This translates to a 5.4% dividend yield based on last closing price. We continue to like the stock for the stable cash flows and prudent management, and await more news on the M&A front. Our fair value estimate increases to S$1.21 (prev. S$1.16) as we roll forward our DCF valuation (8.11% cost of equity, 2% terminal growth). However, given limited upside potential, we maintain our HOLD rating.

Slow and steady

At a Glance

• FY11 underlying profit of S$149.6m and final DPS 2.5 Scts were in line

• Regional M&A and share buybacks cannot be ruled out

• Maintain HOLD with TP of S$1.17

Comment on Results

FY11 net underlying profit of S$149.6m (+1% YoY) was in line with our expectations. Proposed final DPS of 2.5 Scts brings FY11 DPS to 6.25 Scts, same as last year. Group revenue was up 7.7% with logistics segment growing 14%, followed by 7.1% growth for mail and a stable retail segment. Expenses, however, grew faster at 10.8% YoY due to (i) higher traffic and labour costs and (ii) higher interest costs as Singpost raised S$200m debt in March 2010.

Recommendation

Singpost is prepared to face challenges in the mail segment. Singpost would roll out a digital mail solution in 2H11 as an alternative option as physical mail is on the decline.

New CEO (International) to drive regionalization. As Partner at McKinsey, Dr Wolfgang Baier, has been working with Singpost for the last five years and has extensive experience in Asian and Western markets. Logistics, e-fulfillment and e-commerce are three focus areas. With S$200m raised through a bond issue in March 2010, Singpost has enough financial muscle to acquire small companies regionally. Given that Singpost has a mandate to buy 10% of its shares, share buybacks cannot be ruled out either, in our view.

Maintain HOLD. Our TP of S$1.17 is based on DDM (cost of equity 7.7%, growth rate 2%). We maintain our FY12F earnings estimates and assumed annual dividend growth of 2% in the long term.