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.

M&A could be the key catalyst

At a Glance

• Underlying net profit of S$37.3m (up 1% yoy) and quarterly DPS of 1.25 Scents were inline. Lower administrative costs offset the negatives.

• S$200m raised through note-issue in March, may be used for M&A to drive future earnings growth.

• To reflect growth potential through M&A, we switch to DDM based (Cost of equity 7.7%, growth rate 2%) TP of S$1.17.

Comment on Results

Lower administrative costs offset the negatives. Net underlying profit of S$37.3m (1% yoy, 2% qoq) was inline. We highlight that operating costs declined by 2% qoq despite 3% revenue growth qoq. This was achieved by bringing down administrative costs from S$18m in 4Q10 to S$14m in 1Q11, which also offset the impact of higher terminal dues and lower benefits from job credit scheme.

The key challenges for FY11F. (i) Adverse earnings impact (estimated S$3m) from higher terminal dues, although lower than initial estimate of over S$7m.(ii) S$5m reduction in job credit benefits in FY10F as the scheme expires in June 2010.

Potential M&A may drive growth. We like to remind investors that Singpost had issued S$200m 10-year note at fixed rate of 3.5% recently, which may be used towards regional acquisitions. Currently Singpost has invested about S$40m in higher yield financial instruments with average maturity of 2 years. In our view, Singpost is unlikely to deploy all of its funds for M&A in one shot. The company may utilize its funds in a gradual manner through a combination of financial instruments and M&A activity.

Recommendation

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

1Q FY11 results review

• 1Q FY11 results in line: Revenue of S$138MM was up 13.5% Y/Y largely on the back of 11.4% increase in mail revenue and 34.4% increase in logistics revenue (1Q10 Quantium Solutions contributed only 2 months of revenue). Net profit of S$40.7MM (+3.3% Y/Y) was in line with our expectations. An interim DPS of 1.25 cents was declared per previous years.

• Strong bulk mail volume growth: For 1Q11, volumes in bulk mail grew 10.9% where direct mail rose 20.2% and business mail rose 3.5%. Public mail volumes, however, saw a slight decline of 0.2%, evident of gradual esubstitution. Overall mail volume was higher by 9.1%, resulting in a 9% improvement in domestic mail revenue. Despite the strong volume growth, mail operating margin was only slightly higher at 37.8% (1Q10: 37.2%) due to higher operating expenses and potentially due to the onset of higher terminal dues for international mail. However, management highlighted that the impact of higher terminal dues on underlying profit has been less than the 5% as previously guided, as it engages in mitigating measures such as entering into bilateral arrangements to send out international mails via overseas postal operators which are not subject to the higher terminal dues.

• Operating cashflow weaker on higher working capital: Operating cashflow dipped from S$68MM to S$29MM on increased working capital requirements. However, management guided that these are due to timing differences and expects free cash flow for FY11 to be similar to FY10.

• Invested in equity-linked notes: SingPost invested S$38MM of its cash in equity-linked notes (ELN) relating to dividend-yielding Singapore blue chip companies with effective yield of 3-5%, with the intention to partially offset the higher interest costs from its S$200MM, 3.5% fixed rate notes (FRN) issued on 30 March 2010. The ELN are not capital protected. If management does not find suitable M&A targets, it may invest a greater portion of the FRN proceeds into other high-yield financial instruments in the interim. It is necessary that management deploys the cash it raised constructively soon, in our view, otherwise this may result in a decrease in its ROCE and a potential de-rating of the stock.

Cautiously optimistic on its outlook

1QFY11 results in line with expectations. Singapore Post (SingPost) reported a 13.5% YoY rise in revenue to S$138.2m and a 3.2% increase in net profit to S$40.7m in 1QFY11, just 1% shy of our estimates. Annualised results were also in line with the street’s estimates. Revenue growth was due to higher contributions in the mail (+11.4%) and logistics (34.4%) segments. The latter segment was boosted by the consolidation of Quantium Solutions for the full quarter compared to two months in 1QFY10. Recall that the acquisition was completed on 6 May 09. Rental and property income rose slightly by 1.6% YoY to S$10.1m. Excluding one-off items such as benefits from the Jobs Credit Scheme and amortisation of deferred gain on IP rights, underlying net profit rose 1% to S$37.3m.

Funds ready to be deployed. SingPost took advantage of the low interest environment in March to issue S$200m worth of fixed rate notes. We understand that the group has invested about S$38m in higher yielding financial instruments comprising mainly equity-linked notes (ELNs) and other bonds. The ELNs are related to dividend-yielding Singapore blue-chip companies and management explained that this is a temporary measure to generate better returns from idle funds before the group uses them in M&A activities.

Cautiously optimistic. The group is seeing an increase in business activities with an improving economy, but remains “cautiously optimistic” as it continues to face challenges in its industry, such as e-substitution and competition. As such, management reiterated its aim to grow its non-mail contributions and regional business for diversification and growth. More specifically, SingPost will push for regional growth through Quantium Solutions, especially in e-commerce logistics. Meanwhile, the group is also expanding in-country distribution networks in the region, especially in India.

Maintain HOLD. It has been about half a year since the group’s CEO left, and the search for a new CEO is still ongoing. We continue to like SingPost’s stable and resilient business but transformational growth is unlikely to happen overnight, given that the group aims to leverage on its core competencies, and the fact that the top position is still vacant. As expected, an interim quarterly dividend of S$0.0125/share has been declared. Given limited upside potential to our DCF-based fair value estimate of S$1.16, we maintain our HOLD rating on SingPost.

SingPost Q1 profit inches up 3.2% to $40.7m

SINGPOST’S net profit grew 3.2 per cent to $40.7 million for the first quarter ended June 30.

Earnings per share were 2.11 cents, up from 2.045 cents a year ago. Revenue hit $138.2 million, a 13.5 per cent increase from the year before.

Expenses increased 19 per cent to $103.1 million, due in part to the consolidation of SingPost’s regional outfit Quantium Solutions, higher labour costs and reduced benefits from the government’s Jobs Credit Scheme.

Revenue for the mail and logistics segments showed better performances.

Logistics revenue surged 34.4 per cent year on year to $46.3 million, primarily due to inclusion of Quantium Solutions for the full quarter, versus two months in Q1 2009.

Mail revenue rose 11.4 per cent to $95.7 million, on higher domestic and international traffic.

SingPost deputy CEO Ng Hin Lee said: ‘We will continue to push for regional growth through Quantium Solutions, especially in the area of e-commerce logistics, against the backdrop of rapid Internet growth in north Asia. Concurrently, we are expanding our in-country distribution networks in the region, especially in the India market.’

SingPost has declared an interim quarterly dividend of 1.25 cents per ordinary share, to be paid on Aug 31.

While SingPost is constantly pressured by e-substitution and other competitors, Mr Ng is optimistic about future earnings amid the recovering economy.

SingPost aims to remain globally relevant, he said. ‘We will focus our efforts on diversification and growth. Our objective is to build a more balanced revenue and earnings portfolio by growing non-mail contributions and driving regional growth.’

SingPost shares closed flat at $1.13 yesterday, after the release of its Q1 results.