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Saturday, March 21, 2009

Saving for future capital expenses

SingPost may lower its annual dividends to 5 cents per share, which is below consensus expectations of 6 cents, to (i) conserve cash to upgrade or replace its processing machine in 2013-14, and (ii) refinance its corporate bonds that will mature in 2013. Singpost has outperformed STI by 9.6% year to date. Downgrade to HOLD with target price of S$0.82 based on 6% target yield.

Additional S$100m-S$150m capital expenses.
Singpost had installed its mail-processing system in 1997-98, with a 15-year depreciation cycle. Bought for about S$100m, the system will reach its lifespan in 2013-14 and would need to be upgraded or replaced. Including customization efforts, we estimate additional capex of S$100m-S$150m, depending on the machine condition. Regular annual capex averages S$10m.

Refinancing of bonds in 2013.
Singpost’s S$300m corporate bonds that pay interest rate of about 3% will mature in 2013. While Singpost has AA- credit rating, a notch better than A+ at the time of issuing the bonds, it is prudent to back up the bond issue with more cash in hand.

Need to prepare for the future.
Our analysis indicates that SingPost can comfortably fund its capex requirements by reducing dividend per share to 5 cents. It is expected to generate about S$150m free cash flow every year, out of which S$100m could be paid out as dividends, and S$50m retained for future commitments. By 2013, it would have generated an additional S$200m from operations.

Downgrade to HOLD with reduced S$0.82 target price.
Our revised target price is based on 6% target yield, in line with its average historical yield trend. At the current price, Singpost offers 6.5% dividend yield annually, which is still better than the market’s 5% yield.

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