SingPost to launch digital mailbox in H2

It also announced the sale of its pawnbroking business

Total mail volumes are still on the rise in Singapore, but to pre-empt their inevitable decline, SingPost has decided to launch digital mailboxes as an alternative to physical ones.

By the second half of this year, consumers here will be able to opt to have their receipts, bank statements, and bills sent to a digital mailbox instead of a physical one, for free.

‘We are excited to get into this digital space. The postal landscape is changing as customer demands evolve,’ Ng Hin Lee, CEO of postal and corporate services, told BT.

In its latest bid to push the envelope, companies and other organisations which need to mail out business correspondence regularly can deliver these bills and statements electronically to a secure inbox. They will have to pay postage fees, but it is a move Mr Ng thinks will ‘help businesses to enjoy savings in their operating costs’.

Consumers can then access online and via mobile devices this digital mailbox which promises to be spam-free and offers features such as consolidated bill payment and an online storage vault with five years of archiving.

While the take-up rate naturally depends on how many mailers get on board and use the service, SingPost expects more than 500,000 end-users to sign up within three years.

Postal service operators in other countries have begun to offer similar digital mailbox services too. Finland Post’s NetPosti is one example. And the concept behind SingPost’s digital mailbox offering is not new either – companies such as Zumbox and Pitney Bowes offer similar digital mail delivery in the US, bearing witness to the global push to counter falling physical mail volumes.

For now, total mail volumes in Singapore are still rising, but at a slowing pace. Business mail (periodicals, bills, annual reports and the like) volumes have risen to account for about 85 per cent of the 882.8 million items sent in the financial year ended March 2010, but the increase is narrowing.

And as e-mail replaces snail mail and lifestyles change thanks to improved digital connectivity, public mail volumes have shed, on average, 5 per cent a year for the last five years.

Hence the need for the transformation strategy which spurred its recent corporate restructuring exercise and new initiatives, SingPost said.

In line with this transformation, the company also announced yesterday the $1.1 million sale of its pawnbroking business.

All six SpeedCash outlets will be sold to GL Group, an entity of Peng Kwee Watches and Jewellery – SpeedCash’s partner in the valuation, pawning, and retailing of branded second-hand watches.

This divestment, Mr Ng said, will align SingPost’s resources to focus on regional logistics and e-commerce.

SingPost to launch digital mailbox in H2

It also announced the sale of its pawnbroking business

Total mail volumes are still on the rise in Singapore, but to pre-empt their inevitable decline, SingPost has decided to launch digital mailboxes as an alternative to physical ones.

By the second half of this year, consumers here will be able to opt to have their receipts, bank statements, and bills sent to a digital mailbox instead of a physical one, for free.

‘We are excited to get into this digital space. The postal landscape is changing as customer demands evolve,’ Ng Hin Lee, CEO of postal and corporate services, told BT.

In its latest bid to push the envelope, companies and other organisations which need to mail out business correspondence regularly can deliver these bills and statements electronically to a secure inbox. They will have to pay postage fees, but it is a move Mr Ng thinks will ‘help businesses to enjoy savings in their operating costs’.

Consumers can then access online and via mobile devices this digital mailbox which promises to be spam-free and offers features such as consolidated bill payment and an online storage vault with five years of archiving.

While the take-up rate naturally depends on how many mailers get on board and use the service, SingPost expects more than 500,000 end-users to sign up within three years.

Postal service operators in other countries have begun to offer similar digital mailbox services too. Finland Post’s NetPosti is one example. And the concept behind SingPost’s digital mailbox offering is not new either – companies such as Zumbox and Pitney Bowes offer similar digital mail delivery in the US, bearing witness to the global push to counter falling physical mail volumes.

For now, total mail volumes in Singapore are still rising, but at a slowing pace. Business mail (periodicals, bills, annual reports and the like) volumes have risen to account for about 85 per cent of the 882.8 million items sent in the financial year ended March 2010, but the increase is narrowing.

And as e-mail replaces snail mail and lifestyles change thanks to improved digital connectivity, public mail volumes have shed, on average, 5 per cent a year for the last five years.

Hence the need for the transformation strategy which spurred its recent corporate restructuring exercise and new initiatives, SingPost said.

In line with this transformation, the company also announced yesterday the $1.1 million sale of its pawnbroking business.

All six SpeedCash outlets will be sold to GL Group, an entity of Peng Kwee Watches and Jewellery – SpeedCash’s partner in the valuation, pawning, and retailing of branded second-hand watches.

This divestment, Mr Ng said, will align SingPost’s resources to focus on regional logistics and e-commerce.

Steady 3QFY11 results

3QFY11 results in line with expectations. Singapore Post (SingPost) reported a 6.3% YoY rise in revenue to S$148.5m and a 0.7% drop in net profit to S$43.8m in 3QFY11, such that 9MFY11 net profit accounted for 74.7% of our full year estimates and 78.5% of Bloomberg’s mean consensus. Excluding one-off items such as amortization of deferred gain on intellectual property rights and benefits from the Jobs Credit Scheme (in 3QFY10), underlying net profit increased 5.1% YoY to S$40.9m.

Growth in mail and logistics businesses. Mail revenue grew 7.5% YoY on the back of strong growth in the direct mail business and better economic conditions, while international mail was underpinned by growth in e-commerce activities. More transshipment and vPOST shipping activities contributed to the 10.2% YoY increase in logistics revenue, but operating profit from this division declined as transshipment generally has lower margins.

Diversifying its businesses and markets. Management reiterated that it continues to face “formidable challenges” in the postal industry, driven by factors such as e-substitution. With the global trend of declining mail volumes, the group wants to reduce its reliance on mail revenue and diversify its revenue base. Indeed, the mail division’s contribution to total revenue has fallen steadily from 77% in FY08 to 68% in 9MFY11. However, being Singapore’s dominant postal operator, SingPost will still focus on the mail business to meet the changing and growing needs of its customers, while expanding its logistics and retail divisions. The group is also exploring acquisition opportunities to grow its businesses in the region.

Maintain HOLD. To accelerate the group’s transformation and growth, SingPost has announced an organizational restructuring in which there will be a CEO in charge of Postal and Corporate Services while another CEO will focus on the international business. We are positive on this latest development as the segregation of duties should result in a sharper focus on both the mail business (faces own challenges in the industry) and the group’s international expansion efforts (essential to seek new growth drivers). Meanwhile, we continue to await news on the M&A front. An interim dividend of S$0.0125/share has been declared, in line with the group’s usual practice. Though the stock has an estimated dividend yield of 5.3%, there is limited upside potential to our DCFbased fair value estimate of S$1.16. Hence we maintain our HOLD rating.

New CEO (international) for regional Expansion

At a Glance

• Net profit of S$43.8m (-0.7% yoy, +10.0% qoq) and quarterly DPS of 1.25 Scents were in line.

• The appointment of new CEO for international business shows regional focus. Regional M&A and share buybacks cannot be ruled out.

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

Comment on results

Net profit of S$43.8m (-0.7% yoy, +10.0% qoq) was in line. Mail segment grew strongly by 7.5% yoy on the back of direct and international mail, benefiting from higher business activities. This offset the impact of higher terminal dues (about S$2-3m impact in FY11F) and absence of benefits from job credit scheme (S$5m adverse impact in FY11F), which expired in June 2010. 9M11 earnings constitute 77% of our FY11F forecast. 3Q is typically the strongest quarter due to higher mail traffic during the festive season.

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. He will be driving the logistics and retail business, which can expand further regionally. With S$200m raised through bond-issue in March 2010, Singpost has enough muscle to acquire small companies. Given that Singpost has a mandate to buy 10% of its shares, share buy backs cannot be ruled out either in our view.

Recommendation

We do not see any risk to its dividend payout and recommend HOLD with DDM-based TP of S$1.17.

Still waiting for fresh catalysts

Event

• SingPost did as well as can be expected. In other words, we expected its mail business to reflect the current economic strength, and it did. But the logistics and retail businesses did not do so well profit‐wise due to lower margin components coming to the fore. If this is the best it can do despite the economy firing on all cyclinders, then it needs to move faster on its regionalisation and diversification plans. Perhaps the recent management restructuring will speed things along. Meanwhile, HOLD for the yield of 5+%.

Our View

• Net profit of $43.8m was flat YoY. Underlying net profit, excluding one‐off items such as the $2.9m amortisation of deferred gain on IP rights and benefits from the Jobs Credit scheme which ended in June 2010, was lower at $40.9m, though still 5% higher from a year ago. The usual quarterly dividend of 1.25 cents was also declared.

• Mail business did the best on stronger domestic, international and hybrid mail volume, with EBIT growth outpacing revenue growth. However, Logistics margins were affected by lower margin activities such as transhipment as opposed to higher margin customized logistics, while Retail profit fell on lower agency and retail activities.

• Perhaps sensing investors’ impatience with its long‐promised regionalisation and diversification, SingPost recently appointed two CEOs. An ex‐McKinsey consultant will now accelerate its expansion in the region and diversify into non‐postal businesses. Incumbent CEO Ng Hin Lee will lead postal services and strategic acquisitions.

Action & Recommendation

We maintain our HOLD recommendation, mainly for the yield of 5%. Our target price has been raised to $1.29 as we roll over to FY12, still on 15x target PE.