AWAITING NEWS OF LARGER ACQUISITIONS

• Self-storage company for S$37m
  
• Also acquires freight forwarding firm
  
• Enhances logistics & e-commerce capabilities
  

Building its non-mail businesses

In recent months, Singapore Post (SingPost) has been acquiring stakes in companies to build its non-mail businesses – it completed the 100% acquisition of General Storage Company Pte Ltd (GSC) in end Jan for S$37m and the 62.5% acquisition of Famous Holdings Pte Ltd (FH) in end Feb this year for S$60m.

Acquired self-storage company and freight-forwarding firm

GSC operates a self-storage business in Singapore, under the Lock+Store brand. This is not a new business area for SingPost, which has been offering self-storage solutions through S3 (Self Storage Solutions) since 2009. The acquisition will add storage facilities in Tanjong Pagar and Chai Chee for SingPost. Meanwhile, FH is a Singapore-based sea freight consolidator and freight-forwarder. SingPost acquired a 62.5% stake, and there is also an option to transact the remaining 37.5% stake at the end of 2015. Founded in 1988, FH has a regional network with offices in six countries.

Synergies with logistics and e-commerce

Self-storage solutions offer synergies with SingPost’s existing businesses in logistics and e-commerce – delivery and other value-added services can be added to storage solutions. With its network of properties including post offices and delivery bases, SingPost is able to provide integrated services spanning warehousing, fulfillment, delivery and distribution. The selfstorage business is also a good usage option for SingPost’s properties that are industrial-zoned. Meanwhile, FH’s freight-forwarding capabilities complement SingPost’s e-commerce logistics capabilities in regional fulfillment and warehousing, as well as its postal & parcel delivery networks.

Maintain HOLD

SingPost had S$661.5m in cash and cash equivalents, along with financial assets worth S$36.5m, as at Dec 2012. In comparison, these acquisitions remain on a relatively small scale and we are awaiting news of larger acquisitions. Meanwhile, the stock has been trading in a range of S$1.18-S$1.23 since we downgraded it to HOLD on 28 Jan. We like SingPost’s stable operating cash flows and consistent dividends, but see few re-rating catalysts for now. Maintain HOLD with S$1.23 fair value.

S$179m spent on acquisitions so far

• 3Q13 underlying profit of S$39.8 (+2% y-o-y, 22% q-o-q) and interim DPS of 1.25 Scts were in line

• Acquired two more companies for S$97m, taking amount spent on acquisitions to S$179m over the last two years

• Limited disclosure on acquisitions so far. The stock is not cheap at 17x PE. HOLD with revised TP of S$1.14.

Highlights

Divergence between revenue and operating profits. Top line grew 14% y-o-y versus a decline of 3% in operating profits. E-commerce activities for all the segments and new contribution from Novation Solutions (acquired in May 2012) were key drivers of top-line growth. Corporate overheads seem to be the main culprit as operating profits were up across all the segments but group operating profit was still down.

Two more acquisitions in logistics sector recently. In Dec 2012, Singpost paid S$37m for a 100% stake in General Storage Pte Ltd which operates a self-storage business in Singapore, and also carries net debt of S$15m on its books. In Jan 2012, Singpost agreed to pay S$60m for a 62.5% stake in Famous Holdings Pte Ltd which is a freight consolidator and forwarder with offices in six countries. Both the acquisitions aim to consolidate Singpost’s position in the logistics space in the region.

Limited disclosure on acquisitions. Singpost has not disclosed earnings or PER multiples, making it difficult for us to track the progress. The acquisitions are funded by S$350m of perpetual bonds issued in Mar 2012, accounted as equity in our model.

Recommendation

Not cheap at 17x PER, maintain HOLD at revised TP of S$1.14. We adjust long-term growth rate to 0.5% (as evident from 9M12) from 0% earlier while cost of equity remains at 6% in our DDM

S$179m spent on acquisitions so far

• 3Q13 underlying profit of S$39.8 (+2% y-o-y, 22% q-o-q) and interim DPS of 1.25 Scts were in line

• Acquired two more companies for S$97m, taking amount spent on acquisitions to S$179m over the last two years

• Limited disclosure on acquisitions so far. The stock is not cheap at 17x PE. HOLD with revised TP of S$1.14.

Highlights

Divergence between revenue and operating profits. Top line grew 14% y-o-y versus a decline of 3% in operating profits. E-commerce activities for all the segments and new contribution from Novation Solutions (acquired in May 2012) were key drivers of top-line growth. Corporate overheads seem to be the main culprit as operating profits were up across all the segments but group operating profit was still down.

Two more acquisitions in logistics sector recently. In Dec 2012, Singpost paid S$37m for a 100% stake in General Storage Pte Ltd which operates a self-storage business in Singapore, and also carries net debt of S$15m on its books. In Jan 2012, Singpost agreed to pay S$60m for a 62.5% stake in Famous Holdings Pte Ltd which is a freight consolidator and forwarder with offices in six countries. Both the acquisitions aim to consolidate Singpost’s position in the logistics space in the region.

Limited disclosure on acquisitions. Singpost has not disclosed earnings or PER multiples, making it difficult for us to track the progress. The acquisitions are funded by S$350m of perpetual bonds issued in Mar 2012, accounted as equity in our model.

Recommendation

Not cheap at 17x PER, maintain HOLD at revised TP of S$1.14. We adjust long-term growth rate to 0.5% (as evident from 9M12) from 0% earlier while cost of equity remains at 6% in our DDM

Looking For Better Yield Elsewhere

Results slightly better than expected. SingPost 9MFY3/13 results were better than expected. 9MFY3/13 revenue increased by 14.5% yoy to SGD476.3m and net profit excluding one-off items was slightly up by 0.5% to SGD109.1m. However due to rich valuation, we maintain our HOLD rating but slightly upgrade our target price to SGD1.21.

Top line grew strongly. We appreciate Singapore Post’s transformation effort as we saw positive revenue growth momentum in recent quarters. In 9M FY3/13, SingPost recognized revenue growth in all business segments despite the continuous decline in letter volumes. The growth was mainly driven by consolidation of new acquired subsidiary Novation Solutions as well as e-commerce volumes.

Cost pressure prevented bottom growth. Despite respectable top line growth, net profit hardly made any growth (up by only 0.5% yoy) in 9MFY3/13 compared with a year ago. We expect further improvement in revenue following recently announced M&As. However inflationary cost pressure, gradual shift to lower-margin Logistics business and the cost for transformation will continue to weigh on margins and prevent significant net profit growth.

Still early to judge recent M&As. SingPost announced a few M&A deals recently including SGD60m for 62.5% stake in Famous Holdings, a sea freight consolidator and freight forwarder as well as SGD37m for 100% in General Storage, a self-storage provider in Singapore. We understand that those new subsidiaries are currently profitable and acquisition costs were also reasonable. But since those new acquisitions are bigger than previous M&As, in our view much more effort must be put in to fully merge the new subsidiaries with existing business to create real synergy.

HOLD for rich valuation. SingPost’s current dividends yield of 5.2% is not very attractive relative to its historical average of 6.0%. On PER basis, current 17.2x PER is also approaching historical high. We slightly upgrade our earnings forecast to reflect better-than-expected results and recent acquisitions but maintain our HOLD rating.

Look at better yield alternatives

• 2Q13 underlying profit of S$32.7m (-0.3% y-o-y, -10% q-o-q) and interim DPS of 1.25 Scts were in line

• Overseas business contribution rose to 18% in 2Q13 versus 15% in 1Q13 and 13% in 2Q12, driven by acquisitions where viability has not been proven yet

• HOLD as ~5.4% yield is comparable to the yields offered by Singapore telcos who also offer superior growth

Highlights

Costs continue to outpace revenue growth. Operating expenses grew 13% y-o-y outpacing 9% rise in revenues. This was due to inflationary cost pressures and investments in capabilities and resources to expand overseas revenue. We highlight that most of the top line growth can be attributed to acquisitions worth over S$75m done over the last two years. More acquisitions cannot be ruled out. In March 2012, SingPost had issued S$350m of perpetual bonds at 4.25% coupon. This could be in anticipation of acquisition plans and the expiry of S$300m worth of bonds in April 2013. These perpetual bonds are accounted for as equity in our model.

Our View

6.25 Scts DPS is safe in our view. Dividend payout ratio translates to ~90% while future acquisitions can be funded by S$350m of perpetual bonds. However, we don’t think Singpost will hike its payout ratio till it emerges out of its acquisition mode.

The big questions is how viable are these acquisitions? The good part is that Singpost has not put all its eggs in one basket and has bought stakes in about eight small companies in various geographies. However, one key issue, in our view, is that Singpost does not have a controlling stake in some of these companies and the mix may be too widespread. This may leave Singpost at the mercy of local managements of these companies.

Recommendation

HOLD for 5.4% yield. Overall, we think that acquisitions will start to contribute positively to earnings in another 12 months or so. But that could be offset by decline in the domestic mail business. The stock is not cheap at ~17x PE and ~5.4% yield is not too attractive either unless the company can demonstrate some growth potential.