Unlocking Value

Rising headwinds

• In line. SingPost’s 3QFY08 earnings of S$36.8m (+7.9% yoy) were in line with consensus and our estimates. 9MFY08 earnings form 77% of our FY08 earnings estimate. This was a satisfactory set of results with topline and margins coming in within expectations. A DPS of 1.25 cts was also within expectations. Key highlights were: 1) sustained cost pressure; and 2) rising competition from the ongoing liberalisation of the postal system.

• Decent revenue growth. Topline growth (+9.2% yoy) was driven by direct mail (+28% yoy) on the back of a robust domestic economy. Logistics grew 5.3% yoy on increased Speedpost traffic and growth in vPOST online shopping transactions. Retail revenue grew 7.9% yoy as growth in financial services (+16.4% yoy) was offset by a continued decline in agency/bill presentment services.

• But margins were eroded. EBIT margins declined 90bp yoy to 37.8% on the back of rising costs (labour and volume-related) as well as the product mix (faster growth of lower-margin direct mail business). We also note sustained pressure on agency/bill presentment services which overwhelmed gains from financial services. We expect the margin pressure to mount from ongoing liberalisation of the postal system.

• Trimming earnings estimates. We maintain our FY08 earnings estimate but trim FY09-10 estimates by 2-3% to reflect margin pressure from higher labour costs as well as impending competition from liberalisation of the postal system. Our earnings downgrade is buffered by our expectation that SingPost will be able to offset some margin pressure through productivity improvements.

• Downgrade to Neutral from Outperform with lower target price of S$1.20 (previously S$1.41). Our DDM-based target price has been reduced for two reasons: 1) a higher cost of equity of 7.2% from 6.5% previously on evidence of higher earnings risk from sustained cost pressure, substitution as well as impending competition; and 2) our earnings downgrade. The stock lacks catalysts in the near term and we are unconvinced that management will unlock value from the Singapore Post Centre anytime soon. Nevertheless, downside should be limited by a dividend yield of over 6%.

SingPost: New players will squeeze margins

Q3 earnings rise 7.8% to $36.8m on better results for all business segments

SINGAPORE’S liberalisation of basic mail services and the entry of new players will squeeze margins for Singapore Post, the company said yesterday.

In a statement announcing its third-quarter results, the postal operator said that along with rising operating costs in the economy, ‘this will result in margin pressure’.

SingPost, which held the monopoly on basic mail services, said it will pursue and implement initiatives to grow its core mail and logistics businesses. As part of its diversification strategy, it will leverage its retail and distribution network to offer higher value products and services to its customers.

The company is also looking at ways to extend its regional reach.

SingPost is continuing to review its non-core businesses and is exploring opportunities to ‘unlock’ the value of SingPost Centre.

For the third quarter ended Dec 31, 2007, it posted a net profit of $36.8 million or 1.914 cents per share, up from the previous corresponding quarter’s $34.1 million or 1.782 cents per share.

The earnings rise came on the back of better results for all its three business segments of mail, logistics and retail.

Q3 revenue grew 9.2 per cent to $122 million. An interim quarterly dividend of 1.25 cents per share, pay- able on Feb 29, was also announced yesterday.

Mail revenue, which made up the bulk of sales, increased 9.5 per cent to $94.2 million on higher mail volumes.

The logistics segment turned in a revenue of $17.9 million, a rise of 5.3 per cent, from increased Speedpost traffic and growth in its vPost on-line shopping transactions.

Retail revenue grew 7.9 per cent to $15.6 million, as growth in financial services and retail products continue to offset the decline in agency/bill presentment services, said the company.

Rental and property-related income improved by 21.6 per cent to $6.2 million, as a result of higher rental rates and yield enhancement initiatives at SingPost Centre.

Total expenses rose 10.7 per cent to $84.9 million as a result of increased labour and volume-related costs.

The first nine months saw revenue of $353.5 million, up 9.3 per cent, while net profit was $114.8 million, a 13.5 per cent rise.

SingPost’s group chief executive officer Wilson Tan said: ‘The third quarter is traditionally a busier period for SingPost because of the year-end festive season.’

‘In mail, despite the decline in year-end festive postings, we achieved steady growth in direct mail in tandem with a robust Singapore economy,’ he added.

Mr Tan also noted that on the retail front, the company leveraged its network of post offices by expanding its service offerings with festive shopping through shop@post, featuring items such as notebooks, iPods and branded watches.

3QFY08 earnings rose 7.8% yoy

SingPost reported 3QFY08 net profit of S$36.8m, up 7.8% yoy. Revenue rose 9.2% yoy.

Direct mail was star performer in mail segment. Mail revenue rose 9.5% (or S$8.2m) yoy, and accounted for 77% revenue share, due to mail volume increasing 11.8% yoy. This came on the back of a strong 15.6% rise in bulk mail (80% share of domestic mail), due to a) Direct Mail’s increase of 28.3% (40% share of bulk mail); and b) business and others increasing 5.6%. Public mail (balance 20% share of domestic mail), on the other hand, recorded a 3.3% yoy volume contraction. Correspondingly, mail operating profit rose 7.5% yoy.

Financial services drove retail segment. Retail revenue rose 7.9% (or S$1.1m) yoy. Financial services revenue rose 16.4%, and accounted for 31% of retail revenue.

Underlying operating margin of 37.8% is lower than 3QFY07’s 38.7%. Mail operating margin was 39.3%, narrower than 3QFY07’s 40%. Retail operating margin of 19.2% was also narrower than 3QFY07’s 20.1%, due to a drop in commission rate for agency services. Logistics operating margin of 17.5% is close to 3QFY07’s 17.8%. However, underlying operating margin of 37.8% is wider when compared against 2QFY08’s 37.1%.

Robust cashflow generation. Net cash inflow from operating activities was S$132.9m for 9MFY08, up from 9MFY07’s S$122.6m. 9MFY08 capex was a low S$10.9m, representing 3% of revenue.

High dividend yield. SingPost declared an interim dividend of 1.25¢ ps (to be paid on 29Feb08). SingPost aims to pay a minimum dividend of 5¢ ps per annum. We are forecasting 6.7¢ ps total dividends for FY08 (based on 85% payout ratio), giving a yield of 6.4%, which is higher than 3-mth SIBOR of 1.6%.

SingPost remains a BUY. SingPost is attractive based on our DCF valuation of S$1.33 per share – we have assumed a terminal growth rate of 0.7%, a WACC of 6.3% (which factors in cost of debt of 4.6% and cost of equity of 8.9%).

Steady 2QFY08 earnings growth for an attractive dividend play

SingPost reported 2QFY08 net profit of S$39.7m, up 9.8% yoy. Excluding onetime items (comprising 2QFY08 sale of Clementi Central HDB shop unit), underlying net profit was up 10.9% yoy to S$34.8m. Revenue rose 8.8% yoy.

Direct mail was star performer in mail segment. Mail revenue rose 8.5% (or S$7m) yoy, and accounted for 73% revenue share, due to mail volume increasing 9.9% yoy. This came on the back of a strong 11.7% rise in bulk mail (80% share of domestic mail), due to a) Direct Mail’s increase of 15.1% (40% share of bulk mail); and b) business and others increasing 9.1%. Public mail (balance 20% share of domestic mail), on the other hand, recorded a mild 1.3% yoy volume growth. Correspondingly, mail operating profit rose 8.9% yoy.

Financial services drove retail segment. Retail revenue rose 9.0% (or S$1.3m) yoy. Financial services revenue surged 29.1%, and accounted for 47% of retail revenue. Remittances and unsecured lending together contributed 80% of financial services revenue.

Underlying operating margin of 37.1% is similar to 2QFY07. Mail operating margin was 39.1%, vs 2QFY07’s 39.0%. Retail operating margin also widened marginally to 16.3% (from 2QFY07’s 16.2%). These were offset by logistics operating margin narrowing to 14.3% (from 2QFY07’s 15.5%), as logistics is a very competitive business.

Robust cashflow generation. Net cash inflow from operating activities was S$79.7m in 1HFY08, up from 1HFY07’s S$74.6m. 1HFY08 capex was a low S$7.8m, or 3.3% of revenue.

High dividend yield. SingPost declared an interim dividend of 1.25¢ ps. SingPost aims to pay out 80-90% of net profit or a minimum of 5¢ ps per annum. We are forecasting 6.8¢ ps total dividends for FY08 (based on 85% payout ratio), giving a yield of 5.5%, which is higher than 3-mth SIBOR of 2.6%.

SingPost remains a BUY. We forecast 2HFY08 net profit to be driven by the increase in postage rates effective 18 Dec 06 and 1 Jul 07, as well as mail volume expansion. SingPost is attractive based on our DCF valuation of S$1.43 per share – we have assumed a terminal growth rate of 0.7%, a WACC of 5.8% (which factors in cost of debt of 4.6% and cost of equity of 8.2%).