SingPost commits to dividend policy

SINGAPORE Post announced yesterday that it remains committed to its minimum quarterly dividend policy of 1.25 cents per share, despite a 5.6 per cent year-on-year fall in net profit to $37.4 million for the second quarter ended Sept 30.

The weaker profit was due to a $1.3 million one-off expense from the winding up of an associated company in Q2 2008 and the inclusion in Q2 2007 of a one-off gain of $5.6 million largely from the disposal of a property. Excluding one-off items, the group’s underlying net profit was 11.4 per cent higher at $38.7 million.

Revenue for the quarter grew 4.1 per cent to $120.7 million on the back of improved performances across its three business segments – mail, logistics and retail. Earnings per share for Q2 were 1.943 cents, down from the previous corresponding quarter’s 2.065 cents.

For the first half of the financial year, net profit dipped 1.5 per cent to $76.88 million, from $78 million. Revenue rose 4.3 per cent year-on-year to $241.58 million.

Mail revenue for Q2 grew 2.8 per cent to $91.7 million as its various business lines – domestic mail, international mail, hybrid mail and the philatelic business – posted stronger contributions.

Logistics revenue was up 6.4 per cent to $18.8 million during the quarter as revenue from warehousing, fulfilment and distribution grew 28.9 per cent. vPOST also launched a new service, shop@Europe, during the quarter.

Continued growth in financial services such as remittances resulted in an 8.6 per cent increase in revenue to $16.6 million for SingPost’s retail business.

The group’s rental and property-related income also increased 39.3 per cent to $8.2 million due to higher rental income from Singapore Post Centre (SPC). The group is still continuing to review opportunities to unlock the value of SPC, it said.

Group CEO Wilson Tan said: ‘Like other companies, we face an increasingly challenging business environment. Cost containment becomes even more critical; we are taking additional measures to manage costs across the board. While we are focused on costs, we are not taking our eyes off our growth objective.’

SingPost closed at 65 cents yesterday, up 1.5 cents.

Still resilient

• In line. 2Q09 core earnings of S$38.8m (+11.4% yoy) were in line with consensus and our estimates. 2Q09 dividend of 1.25 cts/share also met our forecasts.

• 2Q09 sales +4.1% yoy to S$120.7m driven by: +2.8% mail, +6.4% logistics and +8.6% retail. Growth in logistics growth was from Speedpost, vPOST shipping transactions, warehouse, fulfilment and distribution. Retail growth was driven by financial services and agency fees. SingPost’s rental and property-related income increased by 39% to S$8.2m, driven by SingPost Centre’s higher rental income.

• Focused on cost management. Labour and volume-related expenses, which accounted for a large chunk of total opex, increased by 7.2% yoy and 4.0% yoy respectively.

• Gearing not a concern. The group has S$300m worth of bonds due in 2013. Cost of funding is at 3.13%. There is no financing concern as there is no rollover date in the short-term. We deem our forecast dividend yields as safe.

• Competition outlook. The Reference Access Offer document has been finalised by the IDA. SingPost expects margin pressure due to the liberalisation of the basic mail market and new entrants. We have included the impact of the liberalisation in our forecasts. The potential unlocking of value of Singapore Post Centre could be a catalyst.

• Upgrade to Outperform with lowered DDM-derived target price of S$0.94 (previous: S$1.20). Our FY09-11 estimates remains intact. However we align our cost of equity assumptions with house rates, resulting in higher cost of equity assumption of 8.8% (previous: 7.2%). Given that the stock price has fallen by more than 40% in the past one month, thanks to weak market sentiment, we believe that it is timely to upgrade SingPost as it continues to offer investors defensive earnings and dividend yield of more than 10%.

SingPost warns of higher fees

SINGAPORE Post has warned of a potential increase in its net terminal dues payments for international mailing. This comes after it was announced at the recent 24th Universal Postal Union (UPU) Congress in Geneva, Switzerland, that Singapore would be reclassified as a Target Country (previously known as ‘Industrialised Country’) from the current category of Net Contributor Country for the purpose of terminal dues settlement.

The change will take effect from Jan 1, 2010.

Terminal dues refer to settlements for the processing and delivery of international mail between countries. Singapore will have to apply the relevant terminal dues system from 2010 to 2013 and contribute to the UPU Quality of Service Fund. The group foresees an increase in its net terminal dues payments for international mailing as the dues payable by target countries are generally higher.

Competition worries receding?

Singapore Post (Singpost) has just submitted a modified Reference Access Offer (RAO), which details the procedures and charges on which other postal service providers can gain access to SingPost’s distribution network. Our preliminary reading of the papers suggests competition worries would recede if this modified RAO gets approved by IDA. We also like the company’s stable dividend yield, thanks to its strong operating cash flow. Maintain HOLD.

Competition worries receding? In response to comments by the Infocommunication Development Authority of Singapore (IDA), Singapore Post submitted its modified RAO papers yesterday. The papers detail the procedures and charges for postal service providers that want to gain access to SingPost’s distribution network. From our preliminary reading of the papers, we feel the modifications of access rate schedule are mild. For example, under the Postal Competition Code, SingPost will set its RAO rates to other mail service operators at the standard retail prices minus a discount (equivalent to costs avoided arising from higher economies of scale due to the processing of large quantities needed by operators). In the modified RAO, SingPost maintained its avoidable costs at 1% of its standard retail price. Previously, the feedback from other operators indicated that the rates proposed would not allow them to sell services profitably. Subsequently, competition pressure could ease for SingPost if the modified RAO offer gets approved.

Waiting to see how IDA would regulate RAO rates and execute new competition framework. IDA has not set a deadline for finalising the RAO papers. However, we expect IDA to finish reviewing SingPost’s modified RAO within one month, by Oct 08, like it did in the first round of review. It will likely take another 2-3 months for other operators to negotiate prices and terms with SingPost. We expect competition to kick in from 2009. As of now, four new entrants have been granted postal services licences.

We like the decent yield though. SingPost outperformed the market only in end-FY06 when it declared a special dividend of 10¢/share. The price catalyst from a special dividend, possibly from the sale of Singapore Post Centre, would be less likely in the near term against the backdrop of a softening commercial property market in Singapore

With its extensive distribution network and access to master keys, SingPost could still enjoy robust cash flow to sustain its dividend policy of 80-90% payout or a minimum of 5¢/share p.a. In 1QFY09, SingPost registered operating cash flow of S$52m, compared with a dividend payout of S$24m(1.25¢/share). We expect operating cash flow to dividend to be maintained at 1.4x in FY09-10.

We value SingPost at S$1.07, on a par with our DCF valuation per share (WACC: 5.7%; terminal growth rate: 0.5%). The stable dividend yield limits the downside risk under in the current volatile market environment.