Doing Things

• Sing Post is raising $200 mln via a 10-year fixed rate note issue, to finance "new investments, anticipated capital expenditure and working capital requirements".

• Sing Post's existing 3.13% bonds ($302.91 mln outstanding at end Dec '09) are not due to mature till April 2013.

• The new note issue will raise total borrowings to $502.9 mln, against current Shareholders Funds of $275.52 mln. Cash at end '09 was $148.56 mln.

• Sing Post is expected to release results for ye Mar '10 in late April (on the 30th last year).

COMMENTS

1. We expect the latest development to revive speculation of Sing Post selling the Post Centre at Eunos, and making a special payout.

2. Local press had in July '08 reported that Post Centre was put up for sale at asking price of $850 mln, which would have worked out to 44 cents per Sing Post share. The company announced the termination of the sale negotiations in Apr '09.

3. Fact of the matter is, there is no urgency to sell Post Centre, given Sing Post has done much with it, as seen in the 27% increase in rental and property related income to $30.21 mln in the first nine months of FY 09/10. Revenue from the core business was $391.67 mln.

4. In any case, taking on more debt will not pose a problem, given the strong operating cash flow of in excess of $200 mln a year.

5. We have been recommending BUY, largely because of the attractive utility-type 5.8% yield. (Sing Post has been paying 6.25 cents a share for at least the last 3 fiscal years, comprising quarterly rate of 1.25 cents, and final f 2.5 cents.)

Achieves better-than-expected results

Results above ours and street’s expectations. Singapore Post (SingPost) reported a 12.7% YoY (+7.2% QoQ) rise in revenue to S$139.6m and a 20.6% YoY (+8.9% QoQ) growth in net profit to S$44.1m in 3QFY10. Results were above ours and the street’s expectations as 9M10 net profit accounted for 81% of our full-year estimates and 84% of Bloomberg’s mean earnings estimate. Underlying net profit (PATMI excl. one-off items) rose 6.3% YoY to S$38.9m if we strip out S$2.9m amortization of deferred gain on intellectual property rights (recall acquisition of Postea in May 09), S$2.0m from the Jobs Credit Scheme and S$0.3m from the property tax rebate (Singapore Budget).

Mail and logistics boosted revenue. A rebound in international mail revenue contributed to the upside surprise, rising 23.7% QoQ after last quarter’s 3.4% decline. Quantium Solutions also contributed to higher logistics revenue which rose 7.9% QoQ. We understand that the international mail segment recovered with better business conditions, and also because SingPost secured new customers last quarter, which is a noteworthy fact. Management, however, is not popping the champagne yet as this segment may continue to experience pricing pressure.

Initiatives pay off. Though rental and property-related income grew 22% YoY, the extent of increase is actually much smaller on a sequential basis (+1% QoQ). Higher rental income from the Singapore Post Centre and the leasing of space at repurposed post office buildings boosted on-year income, which would have suffered if such initiatives did not take place, as we understand that average retail rental has fallen to about S$8/sq ft compared to S$15/sq ft during the peak around 2H08.

Growing its reach. SingPost has reiterated that it wants to expand its regional presence. The group currently covers 11 cities in India and is intent on growing its business there. Management also revealed that another area which may present opportunities is the Philippines. Meanwhile, SingPost also aims to grow the logistics, retail and other businesses to reduce its dependence on mail revenue. With the consolidation of Quantium Solutions, we note that the proportion of mail revenue to total sales has fallen from 77% in 4QFY09 to 68% in 3QFY10.

Maintain BUY. SingPost’s operating cash flows remain strong. We have tweaked our estimates to account for the betterthan- expected results, increasing our fair value estimate to S$1.16. With an upside potential of 14.6% and a projected dividend yield of 6.2%, we maintain our BUY rating on SingPost.

Boosted by logistics revenue

• Above; maintain Neutral. 3Q10 earnings of S$44.1m (+20.6% yoy) were 8% above consensus and our estimates, accounting for 29% of our full-year estimate. The outperformance came from higher-than-expected revenue. We have raised our FY10-12 estimates by 2-8%. From Jan 2010, onwards, opex would rise due to higher net terminal dues for international mailing. After adjusting our DPS assumptions, our DDM-derived target price (discount rate 7.3%) also rises from S$1.09 to S$1.11. Although dividend yields are rather attractive at 6%, we remain Neutral on the stock due to a lack of catalysts.

• Logistics revenue drove growth. Revenue grew 12.7% yoy to S$139.6m, thanks to an improving economy and contributions from Quantum Solutions (QS). 9M09 net earnings grew 9.3% yoy to S$124.1m. In line with expectations, 3Q10 dividend was 1.25cts/share.

• Improving economy boosted topline. Mail revenue dipped 1.2% yoy on declines in domestic and philatelic mail, slightly offset by higher international and hybrid mail. Logistics revenue growth of 166% was attributed mainly to QS. Retail revenue was up 4.1% yoy. Rental and property-related income rose 22.2%, thanks to higher rental income from Singapore Post Centre and the leasing of space at repurposed post-office buildings. Operating expenses climbed 8%, because of the consolidation of QS.

• 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, which means that cash could be preserved for this purpose. It has maintained its dividend policy of a minimum 5cts/share.

6% yield plus stable earnings outlook

At a Glance

• 3Q10 net underlying profit of S$38.9m in line
• Management guided for up to 5% adverse impact on FY11F earnings from higher terminal dues.
• 1.25 Scents DPS declared, as expected
• HOLD with TP of S$1.05 based on 6% target yield.

Comment on Results

Net underlying profit of S$38.9m (10% qoq, 6% yoy) was in line with our expectation of S$38m. Non-cash gain of S$2.9m on recognition of intellectual property rights and S$2m gain from job credit scheme were not included in underlying net profit. The key surprise came from growth in international mail (+24% qoq) as company secured a new customer. 3Q10 also benefited from seasonal pick up at new subsidiary Quantium, which was acquired in 1Q10. Quantium contributed S$31m in revenue (up 9% qoq). Rental income also showed a slight improvement q-o-q.

Effective Jan 10, Singpost has to pay higher terminal dues for international outbound mails, as Singapore is now re-classified as a developed country in the postal world. Management guided this could have an adverse impact of up to 5% on earnings, although they would try to minimize it.

Recommendation

Dividend yield of 6% is secure while Singpost looks out for possible acquisition targets. With two small acquisitions made in 2009, Singpost is looking for more acquisitions in the logistics segments, in order to grow its business. We do not see any risk to stable earnings of Singpost and recommend HOLD for a 6% yield.