SingPost – Kim Eng
Marvellous makeover
What’s New
• Singapore Post (SingPost) has demonstrated earnings resilience in the face of structural changes in the global mail industry. Its efforts to diversify into the non‐mail business since its listing in 2003 have paid off with the segment contributing 31% to operating profit in FY Mar11 from 15% in FY Mar05. The stock currently trades at a premium over its peers, given its superior ROE and steady free cash flow that exceeds its dividend
commitment. We upgrade our rating to BUY from HOLD with a target price of $1.18 (total return of 19%).
Our View
• SingPost has made strategic investments in logistics companies in Malaysia, China and Vietnam this year. In the second half of the year, it will launch a digital mailbox service, VBox, to engage customers in the digital space. Initiatives like these are helping the group to mitigate the general trend of mail volume decline.
• SingPost has a strong cash balance of $345.4m as at June 2011. Its six acquisitions year‐to‐date have used up only about $63m out of the $200m raised in March last year. With net gearing at a comfortable 50% level and no near‐term refinancing needs, it means Dr Wolfgang Baier, the newly appointed CEO for international operations, will have greater flexibility to carry out the group’s regionalisation and diversification plans.
• The withdrawal of Capital Group as a substantial shareholder last month caused SingPost to grapple with a slight share overhang. However, the group’s buyback of 33.2m shares since June has provided firm support.
Action & Recommendation
Our target price of $1.18 is pegged at the historical average PER of 14x (implied yield of 5.3%). We believe the catalysts for re‐rating would come from further cash deployment for acquisitions that would bolster longer‐term earnings growth prospects. Upgrade to BUY.
M1 – CIMB
Cutting the line with Vodafone
Roaming and corporate lines to cease
We view negatively M1’s decision to end its partnership with Vodafone from 31 Dec 11 as this may shave M1’s core net profit by 5-10%, based on our estimates. M1 has a roaming partnership with Vodafone whereby users of Vodafone or Vodafone partners roam on M1’s network in Singapore. We also gather from the industry that Vodafone provides mobile telephony for multinational companies through M1. We maintain our NEUTRAL rating on M1 although there are risks to our forecasts and DCF-based target price of S$2.63 (WACC 8.5%) as a result of the cessation of the partnership. M1’s share price should be supported by its fairly attractive dividends. SingTel is our top Singapore telco pick.
The news
M1 announced it is ending its 7-year partnership with Vodafone from 31 Dec 11. M1 has a roaming partnership with Vodafone whereby users of Vodafone or Vodafone partners roam on M1’s network in Singapore. M1 still has roaming partnerships via the Axiata group and Asian Mobility Initiative, a regional grouping of networks which includes Celcom (Malaysia), DTAC (Thailand), Idea (India), Smartone (Hong Kong and Macau), Sun Cellular (Philippines), and XL Axiata (Indonesia).
Comments
Negative development. We are negative on this news as we believe roaming revenue from Vodafone and its partners forms a substantial part of M1’s inbound roaming revenue which contributes an estimated 8-10% to its total revenue. Assuming the Vodafone partnership contributes 20-30% to M1’s inbound roaming revenue, ending it could shave about 2-3% and 5-10% off M1’s revenue and core net profit respectively.
Vodafone also supplies business products (such as Blackberry devices and dongles) at lower prices, and provides M1 users preferential roaming arrangements on Vodafone and Vodafone-partner networks. We also gather from the industry that Vodafone provides mobile telephony for multinational companies (MNCs) through M1. We believe MNCs will gradually shift to Vodafone’s new partner network when their contracts expire.
We believe Vodafone will soon ink a new partnership with SingTel or StarHub for roaming and mobile telephony services in Singapore.
Valuation and recommendation
We remain NEUTRAL on M1 thanks to its fairly attractive dividend yield 6-7%. This is despite downside risks to our earnings forecasts and DCF-based target price of S$2.63 as a result of the cessation of the partnership. SingTel is our top Singapore telco pick.
SingPost – OCBC
Eyeing the Chinese e-commerce market
Another step in regional expansion. Singapore Post (SingPost) recently announced that together with 4PX Worldwide Express, it will set up a joint venture called vPOST Hong Kong (vPOST HK) which will provide internet shopping, shipping, and logistics services. SingPost will invest HK$1.5m and take up a 50% stake in the JV. Recall that Quantium Solutions, a subsidiary of SingPost, had earlier invested S$11.5m for a 20% stake in Shenzhen 4PX Express which provides international express delivery services (excluding postal services), international freight forwarding, import/export of goods and technology. This is in line with SingPost’s strategy to expand its inbound and outbound logistics and ecommerce market.
China’s e-commerce market has huge growth potential. These investments give SingPost a platform for entry into the logistics and high-growth e-commerce market in countries such as China and Hong Kong. The growth potential of China is especially eye-catching (Exhibit 1); as its economy grows, more of its consumers and businesses are able to purchase goods as well as sell to other markets. According to AT Kearney, China’s e-commerce market has grown at a compound annual growth rate of 90% over the past five years to more than US$32b in 2009 and is estimated to be worth US$175b in 20141 . Factors that will drive this trend include an increase in purchasing power among residents which would drive the growth of online shoppers, and the development of greater online security.
Asia Pacific market also holds promise. The outlook for the Asia Pacific market is also bright (Exhibit 2), driven by both businesses and consumers. According to the EMS unit at the Universal Postal Union2 , manufacturers are looking for the best-priced parts and companies are increasingly ordering such products to be shipped from Asia-Pacific. Moreover, as parts get smaller and lighter, shipping products becomes an increasingly attractive option due to lower costs.
But still just a small step. SingPost is taking the right direction but the group is still in the early stages of gaining a strong foothold in the Chinese market. Pending more details on its expansion strategy, we retain our DCF-based fair value estimate of S$1.14 and maintain our HOLD rating. Meanwhile, we like the stock for its decent dividend yield of 6.0% which is backed by stable operating cash flows and a strong financial position (net gearing stands at 0.5x and EBITDA/interest coverage of 18.1x as at 30 Jun 2011); investors may want to rotate into defensive stocks such as SingPost from a tactical asset allocation point of view, amidst the market uncertainty..
STEng – BT
ST Engg shares hold steady after news of exec’s arrest
SHARES of ST Engineering escaped unscathed yesterday following news that a senior officer, as well as some current and former employees, had been arrested over investigations into falsified accounts.
The stock lost just one cent or 0.35 per cent yesterday to finish at $2.83, with some 1.77 million shares changing hands.
By comparison, the Straits Times Index yesterday closed down 0.52 per cent, or down 14.21 points.
ST Engineering said on Monday that Patrick Lee Swee Ching, former group financial controller at ST Marine, two existing staffers and an ex-employee have been arrested by the Corrupt Practices Investigation Bureau (CPIB).
Mr Lee was arrested over an offence under Section 477A of the Penal Code, Chapter 224, which relates to an officer who destroys or falsifies documents ‘wilfully and with intent to defraud’.
Mr Lee was with ST Marine between 2001 and 2006, and joined VT Systems in November 2006.
ST Engineering added that it is believed that the CPIB is investigating certain transactions involving former and current employees of ST Marine.
The two current employees and one former employee of ST Marine arrested have also been released on bail.
These individuals do not hold key management appointments in ST Engineering, the company said.
Mr Lee, now chief financial officer of ST Engineering’s US division, Vision Technologies Systems (VT Systems), was arrested last Thursday. He returned to the US two days after the CPIB arrested him, after the bureau granted him permission to leave the country, and is still chief financial officer at VT Systems.
He has also not been charged in court.
‘Not often do we see a senior manager at a subsidiary of one of the largest listed conglomerates in town arrested but granted bail and allowed to leave Singapore,’ Kim Eng said in a client note yesterday. ‘As Alice would say, curiouser and curiouser.’
Separately, ST Engineering said yesterday that its land systems arm, ST Kinetics, has won a $68 million contract from Singapore’s Ministry of Defence.
The contract, won through an international tender, is to supply Spider Light Strike Vehicles (Spider LSV) and spares. These vehicles are designed such that weapon systems can be mounted on both sides of the driver.
ST Engineering expects to deliver the vehicles between 2013 and 2014.
STEng – BT
Senior ST Engineering exec nabbed in CPIB probe
Former ST Marine financial controller is now out on bail
A senior executive of Singapore Technologies Engineering, as well as former and current employees of the company, have been hauled up by the anti-corruption bureau over investigations into falsified accounts linked to the company’s marine services division.
Patrick Lee Swee Ching, former group financial controller at Singapore Technologies Marine (ST Marine), two existing staffers and an ex-employee have been arrested by the Corrupt Practices Investigation Bureau (CPIB), ST Engineering said in a press release yesterday. All four have been released on bail.
Mr Lee, now chief financial officer of ST Engineering’s US division, Vision Technologies Systems (VT Systems), was arrested last Thursday for an offence under Section 477A of the Penal Code, Chapter 224. The offence relates to an officer who destroys or falsifies documents ‘wilfully and with intent to defraud’. Mr Lee has not been charged in court.
No details were provided on the type of accounts that were being investigated or the date of the alleged offence. Mr Lee was with ST Marine between 2001 and 2006, and joined VT Systems in November 2006.
He returned to the US on Sept 10 – two days after the CPIB arrested him – after the bureau granted him permission to leave the country. He is still chief financial officer at VT Systems.
‘We are aware that two current employees and one former employee of ST Marine have also been arrested by the CPIB and released on bail. These employees do not hold key management appointments in the ST Engineering group,’ said ST Engineering.
The company has also launched an internal inquiry into the matter, it added. ‘We will take appropriate action as necessary after the inquiry has been completed and we have reviewed the findings.’
Mr Lee has been with ST Engineering since 1996. He started as group financial controller in the aerospace sector before moving to ST Marine five years later. Prior to that, he spent 11 years with ExxonMobil, and three years as an auditor at Ernst & Young.
The father of three graduated from Raffles Institution and is a Certified Public Accountant.
ST Marine provides shipbuilding services to customers that include the US Navy. Its shipbuilding contracts with the US Navy are won through its US shipyard unit, VT Halter Marine, which is in turn held through VT Systems.
Those found guilty under Section 477A of the Penal Code may be imprisoned for up to 10 years, ordered to pay a fine, or both.
ST Engineering posted a net profit of $130.5 million for the second quarter ended June, up 5 per cent from a year ago, despite a fall in revenue of 2 per cent to $1.48 billion.
The results were dragged down by the US dollar’s depreciation against the Singapore currency.
Amid a broad market selldown, ST Engineering shares lost 3.07 per cent or nine cents to end at $2.84 yesterday.