Still a good place to park your funds

• Healthy results
  
• Growth potential and good balance sheet
  
• 4.4% dividend yield
  

Healthy FY14 results

Singapore Post (SingPost) reported a 5.9% YoY rise in revenue to S$193.3m and a 17.7% increase in net profit to S$30.7m in 4QFY14, bringing full year net profit to S$143.1m, a 4.8% rise. Excluding one-offs, underlying net profit grew 2.9% to S$145.0m in FY14, 1.8% higher than our estimate. Full consolidation of new subsidiaries and growth in e-commerce related businesses offset declines in the traditional postal business; excluding contributions from acquisitions, SingPost recorded organic revenue growth of 3.0% in 4QFY14.

Growing surely and steadily

Revenue from the international mail segment increased 27% in FY14, contributed by strong growth in e-commerce package volumes. Though the group’s business transformation will still take time (and perhaps more acquisitions), its initiatives are starting to yield results. Backed by a strong balance sheet and stable operating cash flows from its core mail business, the group is able to enhance its logistics network and e-commerce capabilities to cater to the growing industry in the Asia Pacific region. In FY14, revenue from overseas accounted for 27.8% of total turnover (vs 19.1% in FY13), of which Logistics (mainly from the regional network of Quantium Solutions and freight forwarding business of Famous Holdings) made up 88.4% and Mail the remaining 11.6%.

Stock price may be supported as long as dividend yield remains decent

We switch our valuation to the free cash flows from equity method (cost of equity: 7%, terminal growth: 2%) to capture growth from the e-commerce business. As such, our fair value rises from S$1.32 to S$1.42. Besides positive growth prospects, SingPost’s stock has also been buoyed by investors seeking to park their funds in an environment awash with liquidity. Given its consistent dividend payout of 6.25 cents per year, we believe that investors may continue to seek refuge in the stock as long as the dividend yield remains decent. Indeed at current price, the forecast dividend yield is decent at 4.4%, and may be attractive to yield seekers. However, given the limited upside potential, maintain HOLD.

Steady yield play

• 3QFY14 results in line
  
• 1.25 S-cents interim dividend
  
• Unchanged FV estimate
  

3QFY14 results in line

Singapore Post (SingPost) reported 3QFY14 PATMI of S$39.4m which was flat YoY (-0.2%). 9MFY14 PATMI now cumulates to S$112.3m, constituting 76.0% of our full year forecast and we judge this to be mostly in line with expectations. In terms of the topline, 3QFY14 revenue grew 30.2% YoY to S$222.6m, up from S$171.0m in 3QFY13, mainly due to contributions from acquisitions and an increase in e-Commerce activities. Net flow generated by operating activities remained healthy at S$40.2m in 3QFY14 versus S$39.8m generated in 3QFY13. We note that total expense growth in 3QFY14 rose at a rate (up 34.4%) marginally above that of revenue (30.2%) due to increased exposure to lower net margins businesses.

Domestic mail volume decline for the 8th consecutive quarter

Domestic mail volume declined for the eighth consecutive quarter but including e-commerce packages overall mail revenue for 3QFY14 grew 12.8% YoY to S$133.2m. Revenue from the logistics business was boosted by contributions from two acquisitions, General Storage Company and Famous Holdings (acquired Jan-13 and Feb-13, respectively), and grew 64.5% YoY to S$101.2m. Excluding contributions from these two acquisitions, however, logistics revenues grew 4.3% YoY. For the Retail and e-commerce segment, 3QFY14 revenue dipped 6.1% YoY to S$22.6m as contributions from agency services declined. Rental and property-related income for the quarter held steady and increased 1.9% YoY to S$11.4m.

Steady yield play

In line with its usual practice, the group has proposed an interim quarterly dividend of 1.25 S-cents/share. We continue to like SingPost’s consistent dividend policy which is backed by stable operating cash flows, but see few re-rating catalysts for now. Maintain HOLD with an unchanged S$1.32 fair value estimate.

Still delivering on rainy days

• No surprises in results
  
• Lower margins in tough environment
  
• Still a haven for yield seekers
  

2QFY14 results in line

Singapore Post (SingPost) reported a 32.6% YoY rise in revenue to S$203.8m and a 8.5% increase in net profit to S$35.6m in 2QFY14, such that 1HFY14 net profit accounted for 49.4% of our full year estimates. Excluding contributions from acquisitions, the group saw a 9.6% rise in revenue, on the back of growth in e-commerce related activities. Underlying net profit increased 13.8% to S$37.3m in the quarter, in line with our expectations.

Topline growth but even higher expenses

Labour-related, volume-related and admin expenses continued to rise on both a YoY and QoQ basis, mainly due to the change in the group’s business model to a more diversified one, as well as growth in the lower-margin businesses. EBITDA margin was lower at 26.6% in 2QFY14 compared to 31.1% in 2QFY13 and 28.5% in 1QFY14. Due to changing mail profile, high service expectations, keen competition and rising operating costs, the postal industry remains challenging. Meanwhile, cashflow generation remained strong, with net operating cashflow amounting to S$59.7m in the quarter vs. S$48.5m in 2QFY13.

Margins to be pressured in the medium term

We are seeing good topline growth with contributions from organic and inorganic initiatives, driven by e-commerce and regional growth via M&As. However, at the same time, the group is also experiencing the impact of developmental spending and investments. This is in addition to a rising cost environment and the fact that logistics, one of the key areas in which SingPost is growing, has a relatively lower margin compared to its mail business.

Haven for yield seekers

In line with its usual practice, the group has proposed an interim quarterly dividend of 1.25 S cents/share. Despite a challenging business environment, SingPost is still delivering a good ROE of about 43%. We also like its consistent dividends which are backed by stable operating cash flows, but see few re-rating catalysts for now. Meanwhile, the share price is likely to remain supported by investors seeking yield (~4.8% FY14F). Maintain HOLD with S$1.32 fair value estimate.

Regional E-commerce player in the making

• 1Q13 underlying profit of S$36.2m (-0.9% y-o-y, +13.8% q-o-q) was slightly below estimate due to forex losses; declared S$1.25 Scts interim DPS, in line
  
• Transforming into a major E-commerce player in Asia, where it can ride on last mile delivery network of postal peers in various countries
  
• Maintain BUY with a revised TP of S$1.50; has S$146m net cash for more acquisitions
  

1Q13 underlying profit of S$36.2m (-0.9% y-o-y, +13.8% q-o-q) was slightly below estimate due to forex losses; declared S$1.25 Scts interim DPS, in line

Highlights

Revenue grew 33% y-o-y. Excluding contribution from new subsidiaries, revenue grew 6.5%. Overall operating profit edged down 1% to S$49m as it develops the new businesses. Mail segment healthy. This segment booked S$36.8m operating profit, up 6.3% y-o-y after consolidating Novation Solutions. The Logistics segment booked S$3.3m operating profit, up 36%. But operating profit for Retail & E-commerce fell 35% to S$2.4m due to development activities. Trimmed FY14F/15F earnings by 3%. Singpost booked S$2m forex losses from its international mail & logistics businesses. It will manage forex losses more pro-actively going forward but it cannot avoid that completely.

Our View

Singpost is positioned to ride on E-commerce growth in Asia. The company is pursuing a Low-Cost-Carrier (LCC) strategy rather than speed to compete with the likes of DHL and FedEx Singpost enjoys a niche due to its access to last mile delivery network of postal peers in various countries. It has a strong balance sheet with S$146m net cash, and acquires a business only if it is earnings-accretive and provides new capabilities or geographies. Singpost has spent S$179m on acquisitions over the last few years.

Recommendation

Singpost offers mid-single digit growth plus ~5% yield. New acquisitions may give fillip to growth. Our revised S$1.50 TP (DCF: WACC 6%, terminal growth 0%) implies 20% total potential returns.

A role model for mature businesses

• FY13 underlying profit of S$140.9m (+4.1% y-oy) was 3% ahead of our estimates on the back of better organic and inorganic growth.
  
• FY14 to benefit from full-year contribution of acquired companies. FY14/15 EPS raised 14%/19%
  
• Upgrade to BUY with revised TP of S$1.56 as we see significant growth in addition to 4.9% yield
  

All acquired companies are profitable. FY13 sales grew 14%, leading to a 4% growth in recurring earnings. About half of the top-line growth came from newly-acquired businesses while the other half was organic in nature. Novation Solutions was acquired in May 2012 and contributed sales of ~S$23m. General Storage Company and Famous Holdings were acquired in Feb 2013 and contributed aggregate sales of ~S$20m. FY14F will benefit from the full-year contribution of these companies, all of which are profitable, although Singpost has not disclosed its profit contribution yet.

Strong free cash generation supports dividends. Singpost has spent S$179m on acquisitions over the last two years to expand into the region. More than half of this amount has been funded by its free cash flow of S$160-170m versus S$119m of dividends commitments each year. Singpost aims to raise capex over the next three years, which may result in free cash flow matching dividends. With net cash of S$91m, there is ample room to fund new acquisitions to accelerate growth.

Superior growth, dividend yield and gearing metrics. Singpost offers high-single digit growth coupled with 4.9% yield, both of which are superior to telecom stocks under our coverage. We switch to DCF (WACC 6%, terminal growth 0%) to capture growth and our revised TP of S$1.56 implies potential returns of 26%.