OCBC
Steady 3QFY11 results
QFY11 results in line with expectations.
Singapore Post (SingPost) reported a 6.3% YoY rise in revenue to S$148.5m and a 0.7% drop in net profit to S$43.8m in 3QFY11, such that 9MFY11 net profit accounted for 74.7% of our full year estimates and 78.5% of Bloomberg’s mean consensus. Excluding one-off items such as amortization of deferred gain on intellectual property rights and benefits from the Jobs Credit Scheme (in 3QFY10), underlying net profit increased 5.1% YoY to S$40.9m.
Growth in mail and logistics businesses.
Mail revenue grew 7.5% YoY on the back of strong growth in the direct mail business and better economic conditions, while international mail was underpinned by growth in e-commerce activities. More transshipment and vPOST shipping activities contributed to the 10.2% YoY increase in logistics revenue, but operating profit from this division declined as transshipment generally has lower margins.
Diversifying its businesses and markets.
Management reiterated that it continues to face “formidable challenges” in the postal industry, driven by factors such as e-substitution. With the global trend of declining mail volumes, the group wants to reduce its reliance on mail revenue and diversify its revenue base. Indeed, the mail division’s contribution to total revenue has fallen steadily from 77% in FY08 to 68% in 9MFY11. However, being Singapore’s dominant postal operator, SingPost will still focus on the mail business to meet the changing and growing needs of its customers, while expanding its logistics and retail divisions. The group is also exploring acquisition opportunities to grow its businesses in the region.
Maintain HOLD.
To accelerate the group’s transformation and growth, SingPost has announced an organizational restructuring in which there will be a CEO in charge of Postal and Corporate Services while another CEO will focus on the international business. We are positive on this latest development as the segregation of duties should result in a sharper focus on both the mail business (faces own challenges in the industry) and the group’s international expansion efforts (essential to seek new growth drivers). Meanwhile, we continue to await news on the M&A front. An interim dividend of S$0.0125/share has been declared, in line with the group’s usual practice. Though the stock has an estimated dividend yield of 5.3%, there is limited upside potential to our DCFbased fair value estimate of S$1.16. Hence we maintain our HOLD rating.
DBSV
New CEO (International) for Regional Expansion
At a Glance
- Net profit of S$43.8m (-0.7% yoy, +10.0% qoq) and quarterly DPS of 1.25 Scents were in line.
- The appointment of new CEO for international business shows regional focus. Regional M&A and share buybacks cannot be ruled out.
- Maintain HOLD with DDM-based S$1.17 TP (cost of equity 7.7%, growth rate 2%). We have assumed that dividends can grow by 2% p.a. in the long term.
Comment on results
Net profit of S$43.8m (-0.7% yoy, +10.0% qoq) was in line. Mail segment grew strongly by 7.5% yoy on the back of direct and international mail, benefiting from higher business activities. This offset the impact of higher terminal dues (about S$2-3m impact in FY11F) and absence of benefits from job credit scheme (S$5m adverse impact in FY11F), which expired in June 2010. 9M11 earnings constitute 77% of our FY11F forecast. 3Q is typically the strongest quarter due to higher mail traffic during the festive season.
New CEO (international) to drive regionalization. As Partner at McKinsey, Dr Wolfgang Baier, has been working with Singpost for the last five years and has extensive experience in Asian and Western markets. He will be driving the logistics and retail business, which can expand further regionally. With S$200m raised through bond-issue in March 2010, Singpost has enough muscle to acquire small companies. Given that Singpost has a mandate to buy 10% of its shares, share buy backs cannot be ruled out either in our view.
Recommendation
We do not see any risk to its dividend payout and recommend HOLD with DDM-based TP of S$1.17.
Kim Eng
Still waiting for fresh catalysts
Event
SingPost did as well as can be expected. In other words, we expected its mail business to reflect the current economic strength, and it did. But the logistics and retail businesses did not do so well profit‐wise due to lower margin components coming to the fore. If this is the best it can do despite the economy firing on all cyclinders, then it needs to move faster on its regionalisation and diversification plans. Perhaps the recent management restructuring will speed things along. Meanwhile, HOLD for the yield of 5+%.
Our View
Net profit of $43.8m was flat YoY. Underlying net profit, excluding one‐off items such as the $2.9m amortisation of deferred gain on IP rights and benefits from the Jobs Credit scheme which ended in June 2010, was lower at $40.9m, though still 5% higher from a year ago. The usual quarterly dividend of 1.25 cents was also declared.
Mail business did the best on stronger domestic, international and hybrid mail volume, with EBIT growth outpacing revenue growth. However, Logistics margins were affected by lower margin activities such as transhipment as opposed to higher margin customized logistics, while Retail profit fell on lower agency and retail activities.
Perhaps sensing investors’ impatience with its long‐promised regionalisation and diversification, SingPost recently appointed two CEOs. An ex‐McKinsey consultant will now accelerate its expansion in the region and diversify into non‐postal businesses. Incumbent CEO Ng Hin Lee will lead postal services and strategic acquisitions.
Action & Recommendation
We maintain our HOLD recommendation, mainly for the yield of 5%. Our target price has been raised to $1.29 as we roll over to FY12, still on 15x target PE.
Cheers,
~K
