SingPost’s Q4 net profit up 15.8% at $40.91m

Group revenue also rises 15.8% y-o-y to $133.84m

SINGAPORE Post (SingPost) chalked up a 15.8 per cent year-on-year increase in net profit to $40.91 million for the fourth quarter ended March 31, 2010.

Excluding one-off items, such as benefits from the Jobs Credit Scheme, amortisation of deferred gain on intellectual property rights and the impact of the reduction in corporate tax rate last year, underlying net profit grew 12 per cent to $36.5 million, said SingPost.

Group revenue also rose 15.8 per cent year-on-year to $133.84 million, on the back of stronger performance across its various business segments and the consolidation of revenue from its acquisition of Quantium Solutions.

Earnings per share for Q4 were 2.123 cents, up from 1.834 cents in the previous corresponding quarter.

For the full year ended March 31, 2010, net profit was 10.9 per cent higher year-on-year at $164.97 million while group revenue increased 9.2 per cent to $525.51 million. Excluding one-off items, underlying net profit was marginally higher, climbing 0.3 per cent to $147.75 million.

SingPost has proposed a final dividend of 2.5 cents per share – subject to shareholder approval – which would bring the total annual dividend to 6.25 cents per share. If approved, the final dividend will be paid on July 15.

‘To build a more balanced revenue and earnings profile, we are looking to further increase contributions from markets outside Singapore, in particular in Asia-Pacific, and to expand our non-mail businesses,’ said Ng Hin Lee, SingPost’s deputy group chief executive officer.

In March, the group issued $200 million of 10-year fixed rate notes at a yearly interest rate of 3.5 per cent, the proceeds of which will be used to fund new investments and as working capital.

From May 15, SingPost plans to switch to a five-day mail collection and delivery service, in an effort to optimise resources. The initiative is a result of declining public mail volumes – and in particular a 40 per cent reduction of mail on Saturdays – as well as changing lifestyles and business environment, SingPost said, adding that savings will be passed on to consumers.

SingPost closed one cent lower in trading yesterday at $1.09.

Growth rate depends on investment decisions

Historical analysis. Charting Singapore Post’s (SingPost) share price against the STI reveals that the ratio is currently below its historical average ever since SingPost’s IPO in 2003. If one were to hold the view that most of the easy money has been made in the high beta stocks during the stock market rebound since Mar 09, it is then likely that this ratio may stay stable or even rise (i.e. limited downside). We also did a peer comparison and found that SingPost has generally outperformed some of its peers in terms of returns over a five-year period, excluding dividends. As the group proceeds with its regional expansion plans and seeks to diversify its businesses, the stock should continue to perform well, assuming no major hiccups.

Nature of business both a boon and bane. SingPost’s resilient earnings and stable operating cash flows mean that it can weather downturns with ease, and lack of financing should not be a problem with regards to its expansion plans. Besides a cash pile of S$149m as at Dec 09, the group also recently issued S$200m worth of notes that seems well priced amidst a 3x oversubscription rate (refer to earlier report 24 Mar 2010). The onus is on management to avoid over-paying for acquisitions and to make good investment decisions, especially since there is a need to seek new business drivers to sustain growth as the domestic postal industry has limited growth prospects.

Industry updates. The stock price of Pos Malaysia [NOT RATED] surged to a 32-month high yesterday after newswires reported that Nationwide Express Courier Service Bhd may be interested in bidding for a stake in the postal company. Pos Malaysia also said it will double the price of postage stamps for standard mail weighing up to 20g to 60 sen starting 1 Jul 2010. Developments should be monitored for insights regarding the value of Pos Malaysia.

Maintain BUY. The future of SingPost over the long term hinges heavily on its ability to make astute investment decisions as it seeks new business opportunities. Meanwhile, we also like the group’s enthusiasm in pursuing new initiatives in the areas of innovation, social responsibility and its attempts to stay relevant in today’s fast changing world. With a total upside potential of about 15% (including dividend of 5.9%), we maintain our BUY rating with a fair value estimate of S$1.16.

The hunt for acquisition?

• Strong credentials help Singpost raise cheap debt.

• Potential investments should more than offset weakness due to higher terminal dues.

• HOLD with TP of S$1.05 based on 6% target yield.

Strong credentials help Singpost raise cheap debt. Singpost is issuing S$200m 10-year notes at fixed rate of 3.5% per annum. The company intends to use the proceeds for (i) working capital requirements (ii) machine related capex and (iii) regional investments. S&P has rated the notes as AA-, the same rating that Singpost secured for its S$300m notes issued in 2000. Although, not reflected in our model yet, it would raise FY10F net debt to equity to 1.3x from 0.5x.

Free cash flow adequate for capex and working capital, in our view. Management had earlier indicated that capex for replacement or upgrade of its mail-sorting machine in 2013-2014 would be S$70m-S$100m. Assuming dividend payout of S$130m cash (6.7 Scts DPS) and S$30m cash to be retained each year, Singpost should generate sufficient operating cash to fund machine capex in 2013-14. We do not see any issue with refinancing of existing notes in 2013 either

Potential investments (if any) could more than offset weakness due to higher terminal dues. While Singpost has not indicated anything specific, our key assumption is that Singpost can make S$200m worth of investments in the region (possibly logistics industry as indicated earlier) at a reasonable 12-13x PER, similar to its own. After deducting the cost of debt, the investments would still add S$10m or 6% to Singpost FY11F earnings. This should offset potential weakness of up to 5% due to higher terminal dues (interoperator charges) in the international mail segment as Singapore has been re-classified as a developed country from March 2010 onwards (was not reflected in our model).

Issues S$200m worth of notes

Issues S$200m worth of notes. Singapore Post (SingPost) is issuing S$200m in principal amount of fixed rate notes due 2020 with a coupon rate of 3.5%. With a denomination of S$250k, the notes will have a tenor of 10 years from the issue date. SingPost intends to use the net proceeds to finance new investments as part of its growth strategy. The group also expects to use part of it to fund anticipated capital expenditure and working capital requirements.

Comments on the note issue. We had previously mentioned that the group may have to replace or upgrade its mail processing system (bought in 1997-1998) by undertaking capex plans gradually. SingPost also has bonds (principal amount S$300m) maturing in Apr 2013. Given these reasons, this announcement did not take the market by surprise. In our view, it is also an opportune time to issue bonds now when interest rates are still low. As these are fixed rate notes, future increases in interest rates will not affect the group's interest expense.

Strong operating cash flows. SingPost's annual operating cash inflow has historically been substantial (average of S$164m each year from FY06- FY09). Standard & Poor's has also affirmed its AA- long-term corporate credit rating and axAAA ASEAN regional scale rating on SingPost, reflecting the group's "very strong market position in its core domestic and international mail business, high operating efficiency, and solid cash flow measures". Though S&P has revised the rating outlook to "negative" from "stable", this merely means that the long-term credit rating may be lowered, and is not necessarily a precursor of a rating change. Reasons cited were 1) weaker credit protection metrics for the next two years and 2) uncertainty over outcome of M&A activities. We note that even if the rating is lowered to A+, SingPost is still rated as "investment grade".

Broad-based recovery drives industry. Deutsche Post's CEO, Frank Appel, is "optimistic about the future, even though many uncertainties remain…"1 Led by strong Asian export volumes, FedEx recently reported an 18% jump in volume in its International Prority business2 , reflecting the region's recovery. With a broadening of the global economic recovery, arguably led by Asia, SingPost's plans to expand its reach in the region should yield positive results, if properly implemented. With the above reasons and more, we maintain our BUY rating on the stock with fair value estimate of S$1.16, giving a total return of about 12% (includes 5.8% expected dividend yield).

SingPost issuing $200m notes

Due 2020 and in $250,000 units, they will pay interest of 3.5% per annum

SINGAPORE Post plans to issue $200 million of fixed-rate notes, partly to capitalise on investment opportunities.

The notes, due 2020 and denominated in $250,000 units, will be cleared through the Central Depository, SingPost said yesterday. They will pay interest of 3.5 per cent per annum, semi-annually. The expected issue date is March 30.

‘As part of our growth strategy, we have been exploring investment and business opportunities in Singapore and the region,’ said SingPost’s deputy group chief executive and covering CEO Ng Hin Lee. ‘The notes provide us with ready financial capacity to fund any investment opportunities that may arise.’

Net proceeds from the issue will also be used for capital expenditure and working capital requirements.

DBS Bank and UBS have been appointed joint lead managers for the notes, which have been rated AA- by Standard & Poor’s.

S&P has also affirmed its AA- long-term corporate credit rating on SingPost – but revised its rating outlook from stable to negative.

‘We revised the outlook to negative to reflect SingPost’s weaker credit protection metrics for the next two years and uncertainty over the outcome of the company’s M&A activities,’ said S&P credit analyst Andrew Wong.

SingPost’s efforts to boost shareholder returns by venturing into more competitive, lower-margin businesses such as hybrid mail and logistics may result in the company taking longer than expected to repair its credit metrics, Mr Wong said.

SingPost’s move is the latest in a string of note issues.

Recently, Temasek Holdings sold $1 billion of notes due 2020, as part of its US$10 billion guaranteed global medium-term note programme.

In February, Singapore Press Holdings said that it was issuing $300 million of fixed-rate notes due 2015 as the first part of a new $1 billion multi-currency, medium-term note programme.

And in January, Sembcorp Marine quadrupled its multi-currency programme from $500 million to $2 billion.