SingPost - In Pursuit of Growth

31-Oct-2007 KIM ENG - In Pursuit of Growth

♦ Another positive quarter

SingPost reported 2Q08 underlying net profit of $34.8m (+10.9% Y/Y) and underlying EBITDA of $51.4m (+6.5% Y/Y) on revenue of $116m (+8.8% Y/Y). All segments posted higher revenue and operating profits. We had earlier assumed that operating margin would improve from FY07 due to operating leverage. As SingPost?s operating margin is relatively stable, we have thus trimmed our margin forecasts.

♦ Domestic mail volume trending up

The main growth driver was domestic mail (Fig 1), which was bolstered by higher mail volumes and buoyed by price adjustments. Within domestic mail, direct mail volume increased 15.1% Y/Y while business and government mail volume increased 9.1%. We view the stronger mail volume as indicative of the strong economy and SingPost?s effective marketing of its direct mail services.

♦ Actively pursuing growth

We continue to see SingPost growth initiatives bearing fruits, particularly in international mail (as publishers increase their posting volume) and financial services (Fig 1). The company is actively expanding its vPost and hybrid mail business in the region. A new CEO at the helm could also bring a new dimension to SingPost?s business.

♦ Potential bonus from relocating post offices

Upside to our forecasts could arise from SingPost?s sale of any of its post offices. SingPost has an ongoing optimisation programme to relocate some of its post offices to locations which are ?less prime?. We think the sale of Singapore Post Centre (SPC) is less likely as SingPost is currently benefiting from rising rental rates at SPC.

♦ Reducing margin forecast, downgrade to HOLD

In line with its dividend policy, SingPost has declared an interim dividend of 1.25cts/share for 2Q08. We forecast FY09 dividend of 6.9cts/share and arrived at a target price of $1.38 (implied FY09 dividend yield of 5%). Downgrade to HOLD.