Strong performance could continue

• Beneficiary of the strong economy

We expect Singapore Post’s (SingPost) revenue in coming quarters to be strong given the robust Singapore economy, which our economist estimates could grow 14.7% this year. The share price is up 11% YTD and has outperformed the local market by 9%. We think it could continue to perform as earnings could surprise on the upside. We reiterate our Buy rating and raise our price target from S$1.15 to S$1.27.

• Mail revenue to benefit from domestic strength

Historically SingPost’s revenue has correlated strongly with GDP growth, albeit with a three to six month lag. A strong growth picture is emerging from various data points including advertising revenue, tourist arrivals and credit growth, and we believe SingPost’s business should be no exception. We raise our FY11/12/13 EPS estimates from S$0.08/0.07/0.08 to S$0.09/0.09/0.09

• 6.2% yield

In addition to trading at an attractive valuation of 13x FY11E earnings, the stock has an attractive yield of 6.2%. It has historically paid out 80% of its earnings and we believe this could continue as its balance sheet remains healthy.

• Valuation: raise price target from S$1.15 to S$1.27

We derive our price target of S$1.27 from a DCF methodology, assuming WACC of 7.38% and 3% terminal growth. We explicitly forecast long-term valuation drivers using UBS’s VCAM tool

Limited upside potential for now

Stock has performed well. Singapore Post (SingPost) has outperformed the STI not only for the past half a year, but also over a longer period of time since 2004. The stock has risen about 11% YTD, compared to the STI’s near flattish performance. Backed by its relatively stable business, it has been a good place for investors to park their funds during times of uncertainty and volatility. SingPost’s price

has also appreciated by about 79% since the start of 2004 vs the STI’s 63% gain. All these do not take into account its dividend payouts.

Looking at the future. We have mentioned that the future of SingPost over the long term hinges on its ability to make astute investment decisions as it seeks new business opportunities. There is the need to find new drivers to sustain growth as the domestic postal industry has limited growth prospects. As SingPost seeks to transform into an organization offering various solutions to consumers, it is likely to leverage on its core competencies such as its extensive network, technology, and consumer-oriented focus. According to the Universal Postal Union, with over 660,000 post offices in 191 countries, the postal sector is the world’s largest physical distribution network.

Enhancing regional presence. The group is also looking to expand its regional presence using G3 Worldwide Aspac as a platform (with it, the group now has a network of offices in 10 countries/territories). SingPost is also part of the Kahala Posts Group, an alliance of 10 postal services (e.g. Australia Post, China Post Group, Japan Post etc) which focuses on International Express Mail Services (EMS). According to Korea Post, the EMS brand is now recognized as a fast, safe and high-quality premium services in its region1. SingPost has also been forging partnerships with other operators, such as its

joint declaration with the Egyptian National Postal Organisation this year to establish a bilateral partnership.

Downgrade to HOLD. The stock has performed well and has almost reached our fair value estimate of S$1.16. Given limited upside potential to our fair value estimate, we downgrade the stock to HOLD based on valuation grounds. Investors should continue to expect a dividend of about S$0.0625/share per year given the group’s comfortable cash flow position, barring unforeseen circumstances.

Final dividend as expected

• Within expectations; maintain NEUTRAL. FY10 core net profit rose 10.9% yoy to S$165.0m, 1% above our expectations and consensus. 4Q10’s core net profit of S$40.9m, a rise of 15.8% yoy, was also within expectations and accounts for 24% of our full-year estimate. SingPost announced a final dividend of 2.5 cts/share, in line with our forecast. After raising our FY11-12 earnings estimates by 2-3% as we account for higher logistics revenue, our DDM-derived target price (discount rate 7.3%) rises from S$1.11 to S$1.13. We also introduce our FY13 estimates. Although dividend yields are rather attractive at 5.8%, we remain NEUTRAL on the stock due to a lack of catalysts. Furthermore, operating margins will be affected by higher net terminal dues for international mailing from Jan 2010.

• Logistics revenue drove growth. FY10 revenue grew 9.2% yoy, thanks to logistics revenue growth. Mail revenue fell 2.3% while logistics revenue leapt 140.2% yoy due to the inclusion of Quantium Solutions (QS). Retail revenue rose 2.4% yoy on the back of increased contributions from financial services and retail products. Rental and property-related income rose 20.9% yoy to S$40.4m, driven by higher rental income from the Singapore Post Centre and the leasing of repurposed post office buildings. Operating profit increased 12.9% yoy to S$201.5m, due largely to the inclusion of QS, but was partially offset by lower retail operating profit as a result of higher staff costs and lower contributions from higher-margin financial services.

• Outlook. SingPost is cautiously optimistic on its outlook, given an improving economy. We believe that more acquisitions could be in the pipeline as part of its regional expansion strategy given its strong cash position and recent S$200m fixed rates notes issuance. It has maintained its dividend policy of a minimum 5cts/share.

No surprises once again!

At a Glance

• Underlying net profit grew 12% y-o-y to S$36.5m, helped by S$1.4m forex gain and S$2.8m tax savings

• Declared 2.5 cents DPS, as expected.

• Potential investments should more than offset weakness due to higher terminal dues, in our view.

• Maintain HOLD and S$1.05 TP based on 6% target yield

Comment on Result

Net underlying profit of S$36.5m (+12% y-o-y, -7% q-o-q) exceeded our S$33m forecast because of (i) S$1.4m forex gain due to stronger regional currencies; and (ii) S$2.8m tax savings as Singpost had over-provided for taxes in previous years.

Business is on recovery path, but margins are under pressure. Revenue in all three business segments improved y-o-y, but operating margins were under pressure because of consolidation of (i) Quantium Solutions, which regional logistics business reaps lower margins, and (ii) smaller contribution from higher margin financial services.

Management on right track to face challenges ahead. Higher terminal dues could reduce Singpost’s earnings by up to 5%. Additionally, job-credit benefit would drop to S$2m in FY11F from S$7m in FY10F as the scheme will expire in June this year. However, Singpost did not include job-credit benefits in its underlying net profit. Recall that Singpost had issued S$200m 10-year notes at a fixed rate of 3.5% recently, whose proceeds could be utilized for regional acquisitions, in our view, to offset potentially weaker earnings.

Recommendation

We do not see any risk to its dividends and recommend to HOLD Singpost for the 6% yield.

FY10 results within expectations

Results within expectations. Singapore Post (SingPost) reported a 9.2% rise in revenue to S$525.5m and a 10.9% increase in net profit to S$165.0m in FY10, both within 4% of our full-year estimates. However, net profit was better than the street’s expectations (S$153m Bloomberg consensus). In 4QFY10, group revenue rose by 15.9% YoY due to improvements in all business segments (mail, logistics, retail), as well as inclusion of revenue of Quantium Solutions. Excluding Quantium’s consolidation, revenue rose by 3.8%. Rental and property-related income also grew by 5% to S$10.2m with higher rental income from the Singapore Post Centre and leasing of space at repurposed post office buildings.

Better outlook. The outlook for the group is now better with a pick up in business activities. SingPost’s earnings are directly dependent on the performance of the Singapore economy, with more than 95% of its profits coming from the island. Just last month, the official growth forecast of the economy was upgraded from 4.5-6.5% to 7-9% for 2010 after 1Q10 GDP expanded strongly by 13.1% YoY. However, SingPost maintains a “cautiously optimistic” outlook given the challenges facing the postal industry as a whole. The group is also looking to diversify its contributions from overseas markets to expand its non-mail business.

Seeking growth opportunities. The group said that it has been actively exploring investment and business opportunities in Singapore and the region. SingPost has a strong cash position of S$390m as at 31 Mar 2010, aided by its recent S$200m bond issuance, which the group will allocate between financing new investments (bulk of proceeds), anticipated capex and working capital requirements. The market is likely looking forward to expansion-related announcements but we do hope that any acquisition 1) is not made just for the sake of acquisition, 2) value-creation will happen, 3) new development leverages on the group’s core competencies and 4) avoid overpaying as with any acquisition.

Maintain BUY. The search for the CEO is still ongoing, but the group’s management has veterans in the relevant industries, which should keep operations running smoothly. Occupancy at the Singapore Post Centre also remains high at 98.6%. A dividend of S$0.025/share has been declared, bringing the full year payout to S$0.0625/share, same as FY09’s. With a total expected return of about 12% (including 5.7% expected dividend yield), we maintain our BUY rating on SingPost with a DCFbased fair value estimate of S$1.16.