More buybacks and M&A?

At a Glance

• Net profit of S$39.7m (-2% yoy, -2% qoq) and quarterly DPS of 1.25 Scents in line

• S$200m raised through note-issue and could be used for share buybacks and M&A; hunt for new CEO is still on.

• We have assumed Singpost can grow dividends by 2% in the long term. Maintain HOLD with DDM- based TP of S$1.17.

Comment on Results

Net profit of S$39.7m (-2% yoy, -2% qoq) was in line. We highlight Singpost’s tight cost control, which almost 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) as the job credit scheme expired in June 2010.

Potential M&A may lead to earnings upside. We like to remind investors that Singpost had issued S$200m 10-year notes at fixed rate of 3.5% recently, which may be used towards regional acquisitions. Currently, Singpost has invested about S$37m in higher yielding financial instruments (likes of equity linked notes), used another S$10m for share buybacks in the last quarter while the rest is lying idle in bank-deposits.

Given Singpost’s conservative track record, we would expect the company to take small steps in deploying its cash. As the mail sector is highly regulated in most countries, it is not easy for Singpost to find a good target. Given that the company has a mandate to buy 10% of its shares, more share buybacks cannot be ruled out in our view.

Recommendation

We do not see any risk to its dividends. Maintain HOLD with DDM-based TP of S$1.17 (cost of equity 7.7%, growth rate 2%).

SingPost’s Q2 profit slides 2.5% to $39.5m

SINGAPORE Post saw net profit slide 2.5 per cent year on year to $39.5 million for its second quarter ended Sept 30, despite revenue rising 5.6 per cent to $137.6 million as its mail and logistics segments did better.

Excluding one-off items such as the amortisation of deferred gains on intellectual property rights and benefits from the Jobs Credit Scheme, underlying net profit was $36.5 million, up 3.2 per cent from Q2 last year. Earnings per share fell to 2.053 cents, from 2.104 cents previously.

As at Sept 30, SingPost’s total assets were $1.1 billion and its cash and cash equivalents were $335.7 million. Its net gearing ratio was 0.58 times. Total expenses rose 10.3 per cent in Q2 to $104.1 million, while operating profit was 0.1 per cent lower at $51.14 million.

For the first six months, net profit was almost flat at $80.17 million, while revenue rose 9.4 per cent to $275.83 million. Excluding one-off items, SingPost recorded an underlying net profit of $73.8 million, up 2.1 per cent from $72.3 million. ‘The group continues to face the challenges of operating in a changing postal landscape, as well as competitive and cost pressures in the business environment,’ SingPost said yesterday. ‘The group is seeking new growth opportunities to diversify and grow its businesses in Singapore and the Asia-Pacific region.’

SingPost said it is focusing on growing Quantium Solutions’ business beyond cross-border mail and expanding its core competencies into regional markets. The board has declared an interim dividend of 1.25 cents, payable Nov 30. SingPost shares rose two cents to close at $1.18 yesterday.

• The close yesterday is only 7 cents away from its peak of $1.30 reached in mid-07.

• The “boring” company has well outperformed SingTel, which still owns 25% of it: Sing Post started the year at $1.02 and Sing Tel at where it is currently ($3.10 yesterday).

• One development which we would not rule out is Sing Tel divesting or reducing its stake in Sing Post. (Sing Tel sold 95 mln Sing Post shares on Dec 12 ’05 at $1.107 each.)

• Any impact is however unlikely to be significant given that the overhang has not been an issue all these years. Besides, the stake worth almost $600 mln is of little strategic importance to Sing Tel, with a market cap of $almost $50 bln.

• The other development of likely significance is the government land tender in Eunos right next door to the Post Centre, which Sing Post had hoped to sell before being jettisoned because of the financial crisis. The land tender is expected before end 2010.

• Even if the stock were to drop on news of share placement by Sing Tel, a new “base” / support has been established at $1.13, the price at which SingPost has, between Aug 12th and 31st, bought back 8.597 mln shares. (All, except the buy-back of 1.968 mln shares on Aug 19th was at $1.12 a share.)

• We expect the 2007 peak to tempt some to take profit / sell. At $1.30, yield would be 4.8%.

• The close yesterday is only 7 cents away from its peak of $1.30 reached in mid-07.

• The “boring” company has well outperformed SingTel, which still owns 25% of it: Sing Post started the year at $1.02 and Sing Tel at where it is currently ($3.10 yesterday).

• One development which we would not rule out is Sing Tel divesting or reducing its stake in Sing Post. (Sing Tel sold 95 mln Sing Post shares on Dec 12 ’05 at $1.107 each.)

• Any impact is however unlikely to be significant given that the overhang has not been an issue all these years. Besides, the stake worth almost $600 mln is of little strategic importance to Sing Tel, with a market cap of $almost $50 bln.

• The other development of likely significance is the government land tender in Eunos right next door to the Post Centre, which Sing Post had hoped to sell before being jettisoned because of the financial crisis. The land tender is expected before end 2010.

• Even if the stock were to drop on news of share placement by Sing Tel, a new “base” / support has been established at $1.13, the price at which SingPost has, between Aug 12th and 31st, bought back 8.597 mln shares. (All, except the buy-back of 1.968 mln shares on Aug 19th was at $1.12 a share.)

• We expect the 2007 peak to tempt some to take profit / sell. At $1.30, yield would be 4.8%.

Makes Sense

• The company made its first-ever share buy-back yesterday, buying 500,000 shares at $1.13.

• The mandate allows it to buy up to 192.775 mln shares, or 10% of existing issued capital.

• Note that Sing Post raised $200 mln via the issuance of the 3.5% 10-year notes in March this year.

• Based on 6.25 cents dividend for ye Mar ’10 (as for the preceding 3 fiscal years), the yield at $1.13 is 5.5%.

• Given there is no immediate need for the new funds raised in March, buying back its own shares does make eminent sense.

• The stock, for which we have maintained a BUY for some time, has done reasonably well with little fanfare.