Resilient earnings despite slowdown

Singpost announced core net profit of S$36.6m (flat y-o-y, – 2.4% q-o-q) that was c.10% above our forecast, due to higher rental income from a larger lease area following the refurbishment of its post offices. Meanwhile, the impact of the global slowdown was visible in higher provisions and slower topline growth. An interim 1.25 cents DPS was declared, as expected.

Budgetary benefits expected to offset potentially lower rental income. The job-credits and corporate tax reduction would benefit its bottomline by about 3%. But Singpost’s rental income could drop, as one-third of its leases are due for renewal every year.

Impact of slowing economy already captured in our estimates. Singpost was able to maintain flat revenue during the Asian financial crisis in 1997/98, while revenue fell only 2% during the SARS crisis in FY04. We expect a 3% decline in Singpost revenue for FY10F.

Competition not a major concern. Singpost has launched new initiatives in its business mail (22% of total revenue) and international mail (24% of total revenue) segments. These initiatives should mitigate the leakage in Singpost’s revenues, given that its competitors – typically small companies – would be hit harder by the slowdown.

Raised earnings, maintain Buy. We raised our FY09F earnings by 2.5%, but there is no change to our FY10F estimates. Maintain BUY with a revised target price of S$0.88, based on 12x FY10F PER (historical PER range is 15x- 18x) as we roll forward our valuation window. The stock offers a minimum annual DPS of 5 cents (6.5% yield) that is payable quarterly.

Resilience is the word

Results in line with expectations. Singapore Post (SingPost) reported creditable results amid a challenging environment, with revenue increasing 1.6% YoY to S$124.0m and net profit declining marginally by 0.5% to S$36.7m in 3Q09. This is in line with our expectations as both YTD revenue and net profit comprised 75% of our FY09 estimates. Revenue grew in all three business segments, with retail enjoying 5.5% growth, followed by logistics at 2.1% and mail at 1.5%. Rental and property-related income grew by 34% due to higher rental income from the Singapore Post Centre (SPC) and contributions from leasing of space at re-purposed post office
buildings.

Slowing economy, but there are things to cheer about too. The slowing global and domestic economy will undeniably impact SingPost’s financials, and indeed the group’s 3Q08 selling expenses rose by 43.5% YoY as higher provisions were made for doubtful debts. However, several measures unveiled by the recent Budget such as the Jobs Credit Scheme, reduction in corporate tax and property tax rebates will benefit SingPost as well. We are also seeing very proactive measures by the group to counter the downturn, such as greater cost containment, new services to spur revenue, as well as continued measures to re-purpose post offices.

Cost management is the key. The group stepped up on cost management measures in the last quarter, such that all categories of costs except selling expenses moderated in growth. Labour and related expenses grew by 4.9% YoY compared to 7.2% in 2Q09 as SingPost kept a lid on temporary and contract labour costs, which is expected to moderate in the coming quarters. Tighter cost control in other areas such as promotional and marketing activities also resulted in lower expenses.

Maintain BUY. The slowing global and domestic economy is probably the main concern for most stocks, including SingPost, but the defensive nature of the group’s business means it will outperform the rest in a deteriorating and uncertain environment. Having taken into consideration weaker economic conditions and factors cushioning the decline in the group’s financials, we are maintaining our estimates and therefore keep our fair value estimate of S$0.93. As such, we maintain our BUY recommendation for SingPost. A quarterly dividend of S$0.0125 per share will be paid, sticking to SingPost’s dividend policy of minimum S$0.05 per share a year, implying at least a 6.5% yield.

Lacking catalysts for now

• In line. 3Q09 core earnings of S$36.6m (-0.5% yoy) were in line with consensus and our estimates, accounting for 24% of our full-year estimate. Revenue grew 1.6% yoy to S$124.0m. 3Q09 dividend of 1.25 cts/share met our forecast.

• 3Q09 sales up 1.6% yoy, driven by mail (+1.9%), logistics (7.2%) and retail (+11.5%). As expected, overall revenue growth was weak due to the poor economic environment. Mail revenue grew on higher volumes and increased hybrid mail contributions. Logistics revenue growth was attributed to higher warehousing, fulfilment, distribution and shipping revenue, offset by lower Speedpost revenue. SingPost continued to focus on controlling operating expenses, in particular labourrelated expenses.

• Well-positioned to defend its position. While the liberalisation of the basic mail service market in Apr 07 has increased competition, we believe SingPost is still in a strong position to defend its position as the leading postal service company. SingPost continues to hold a monopoly over stamp issues and is the only postal service company with the master-door key to all letterboxes in private apartments and HDB estates. Long term, we believe that liberalisation would have a limited impact on SingPost as the group still benefits from a much stronger brand name and an entrenched retail network, compared with the four other entrants.

• Cutting earnings by 1-7%. We have cut our FY09-11 earnings to reflect the impact of the slowing economy on business mail, express mail and retail revenue.

• Downgrade to Neutral from Outperform; lower DDM-derived target price of S$0.88 (previously S$0.94). SingPost’s share price has risen more than 18% since our upgrade last quarter. We believe that the positives have been reflected in the share price. Re-rating catalysts could include regional growth opportunities and a bigger share of the express mail market, which is still dominated by the international players. Its share price is likely to be supported by its defensive business model.

In Post We Trust

Singapore’s established postal services operator. Singapore Post (SingPost) is the designated Public Postal Licensee for Singapore. It provides domestic and international postal services, and is also a logistics provider in the domestic market with global service offerings to more than 220 territories/countries. Leveraging on its retail distribution network, SingPost also provides agency and financial services. In 1H09, the group achieved a 4.3% YoY rise in revenue to S$241.6m but incurred a 1.5% fall in net profit to S$76.9m. Excluding one-off items, underlying net profit was higher by 11.5% at S$77.7m.

Should remain dominant despite liberalisation. Despite the liberalisation of the basic mail services market in Apr 07, SingPost is still in a strong position to remain as the dominant postal services operator. Only it can hold the masterdoor keys to letterboxes provided by property owners and developers, including those in HDB estates, as dictated by the Info-communications Development Authority (IDA). With other advantages like an established distribution network, significant free cash flow, a monopoly over stamp issues and an entrenched brand name, we believe that the liberalisation should have limited impact on SingPost.

Defensiveness amid uncertainty. SingPost has stable operating and free cash flows given the nature of its business. It has also been increasing its dividend per share since its IPO in 2003 to S$0.0625 in FY08. With the uncertainty in today’s stock markets, its earnings are omparatively defensive. Although mail volume growth may be affected by e-substitution and the slowing economy, SingPost has undertaken proactive measures, as evidenced from its launched initiatives and diversification of services.

Initiate with BUY. The defensive nature of SingPost’s business and its dominant market position renders it an attractive investment. Its proactive measures demonstrate its resolution to safeguard its profits, making it an even more compelling stock. Moreover, with a long list of properties under its name, SingPost may be able to unlock asset value when the time is ripe. We initiate SingPost with a BUY recommendation and S$0.93 fair value, derived from the free cash flow to equity approach (cost of equity 8.8%, terminal growth 2%). SingPost has a dividend policy of minimum S$0.05 per share a year, implying at least a 6.3% yield. Assuming SingPost continues its S$0.0625 dividend per share in FY09, this would imply a 7.9% yield, which is attractive given its defensiveness.

Good numbers inspire confidence

Story: Singpost announced underlying net profit of S$38.7m up 11.4% y-o-y, near the upper end of our expectations. Costcontrol was the key again as expenses rose only 4.2% y-o-y compared to double-digit increase, which we saw in 2H08. As expected, interim dividend of 1.25 cents was announced.

Point: We want to highlight three key points.

1. Slowing economy is a concern, but not a big threat. Management revealed that Singpost was able to maintain flat revenues during the Asian financial crisis in 97-98 while revenue declined only 2% during the SARS crisis in 2003. In our view, a slowing economy could result in corporates cutting their spending, and we have modelled in a 1.3% decline in FY10 revenue, taking reference from previous crisis periods.

2. Singpost is tracking competition well. We believe that competitors have limited pricing flexibility due to the need to use Singpost’s network. Singpost launched several new initiatives in 2Q09 to further improve the quality and speed of its services. We think these initiatives should be effective in limiting the leakage of Singpost revenues.

3. Maintain FY09 estimates while reducing FY10 estimates by 6%. In 1H09, Singpost has already achieved 54% of our FY09 earnings forecast despite cost pressures from higher labor wages and oil price. Traditionally 2H is stronger than 1H due to more mail volume in the festive season. While there are challenges ahead, we believe that Singpost should be able to achieve the remaining 46% of full year net profits in 2H09. We have lowered our FY10 earnings estimates by 6% to factor the impact of the slowing economy and new competition.

Relevance: Maintain BUY with revised target price of S$0.85 pegged at lower 12x FY09 PER due to broader market de rating (Previously 15x due to historical trading range of 15-18x). Annual dividend of 5 cents is attractive. The stock is trading at 10x FY10 bear-case earnings, which implies limited downside.