In Post We Trust

Fair Value: S$0.93

General Data
Issued Capital : 1,926 millions
Mkt Cap S$ 1,531 millions
Major Shareholder : SingTel (25.7%)
Free Float (%) 74.2
NTA per share (S$) 0.118
Daily Vol 3-mth (‘000) 4,079
52Wk High (S$) 1.180
52Wk Low (S$) 0.795

Singapore Post (SingPost) is the designated Public Postal Licensee for Singapore. It provides domestic and international postal services, and is also a logistics provider in the domestic market with global service offerings to more than 220 territories/countries. Leveraging on its retail distribution network, SingPost also provides agency and financial services. In 1H09, the group achieved a 4.3% YoY rise in revenue to S$241.6m but incurred a 1.5% fall in net profit to S$76.9m. Excluding one-off items, underlying net profit was higher by 11.5% at S$77.7m.
Should remain dominant despite liberalisation. Despite the liberalisation of the basic mail services market in Apr 07, SingPost is still in a strong position to remain as the dominant postal services operator.
Only it can hold the masterdoor keys to letterboxes provided by property owners and developers, including those in HDB estates, as dictated by the Info-communications Development Authority (IDA). With other advantages like an established distribution network, significant free cash flow, a monopoly over stamp issues and an entrenched brand name, we believe that the liberalisation should have limited impact on SingPost.
Defensiveness amid uncertainty. SingPost has stable operating and free cash flows given the nature of its business. It has also been increasing its dividend per share since its IPO in 2003 to S$0.0625 in FY08. With the uncertainty in today's stock markets, its earnings are comparatively defensive. Although mail volume growth may be affected by e-substitution and the slowing economy, SingPost has undertaken proactive measures, as evidenced from its launched initiatives and diversification of services.
Initiate with BUY. The defensive nature of SingPost's business and its dominant market position renders it an attractive investment. Its proactive measures demonstrate its resolution to safeguard its profits, making it an even more compelling stock. Moreover, with a long list of properties under its name, SingPost may be able to unlock asset value when the time is ripe. We initiate SingPost with a BUY recommendation and S$0.93 fair value, derived from the free cash flow to equity approach (cost of equity 8.8%, terminal growth 2%). SingPost has a dividend policy of minimum S$0.05 per share a year, implying at least a 6.3% yield. Assuming SingPost
continues its S$0.0625 dividend per share in FY09, this would imply a 7.9% yield, which is attractive given its defensiveness.

I. Background in brief
Singapore Post (SingPost) is the designated Public Postal Licensee for Singapore. It provides domestic and international postal services, and is also a logistics provider in the domestic market with global service offerings to more than 220 territories/countries. Leveraging on its retail distribution network with its post offices, self-service automated machines (SAMs) and vPost, its internet portal, SingPost provides not only postal but also agency and financial services.

II. Investment highlights
Dominant postal services operator. SingPost has been, and still is, the dominant player in the postal services industry in Singapore. Although the basic mail services market was liberalised in April 2007, SingPost still holds the masterdoor keys to letterboxes provided by property owners and developers, including those in HDB estates. As such, new entrants to the industry either have to utilize SingPost's network or deliver mail door-todoor, limiting pricing flexibility. With other advantages such as an established distribution network, significant free cash flow, a monopoly over stamp issues and an entrenched brand name, we believe that the liberalisation should have a limited impact on SingPost.
Defensiveness amid uncertainty. We like SingPost for its stable operating cash flows given its non-cyclical business. Historically, SingPost has weathered economic downturns well, with flat revenues during the Asian financial crisis and a marginal 2% fall during the SARS crisis. This is especially relevant now given that the world is probably experiencing the worst slump since the Great Depression, with companies going through tough times in the face of falling demand and drying credit lines. SingPost has stable operating cash flows (Exhibit 1), a strong balance sheet and
dominant market position. Management has reiterated its dividend policy of a minimum of S$0.05 per share each year. Such factors render it an attractive stock given the current volatile market conditions. SingPost has also outperformed the general market over the past year in terms of share price, excluding dividends.

Opportunities for growth. SingPost has been launching new services and initiatives over the past few years, and latest ones include "ClickPost", an internet-enabled one-stop mailing solution for customers and "A.M. Mail", a time-certain service that bridges the gap between express mail and regular mail. It has also leveraged on its wide retail network via partnerships with companies such as GE Money, ERA Realty and Prudential. Direct mail (junk mail) is a segment that SingPost is targeting for growth by capturing a bigger slice of the advertising market share. According to SingPost, its current share is 4-5% of the Singapore market, while counterparts in
developed countries such as the UK enjoy about 14% of their country's market share. SingPost therefore believes it has potential to grow in this area.
Potential boosts from assets. SingPost is able to unlock value from its properties, and management has previously expressed interest in selling its flagship building, the Singapore Post Centre (SPC), next to Paya Lebar MRT Station. The group has also been selling some of its smaller properties, such as HDB shop units at Boon Lay Place and Clementi Central for S$2.8m and S$7.9m respectively. Though there are potential capital gains to be reaped from such asset sales, the likelihood of more sales, especially that of SPC, could be lower given the weakening property market. SingPost is also repurposing some of its post offices such as its Tanglin Post Office
which has been converted into a lifestyle hub with tenants such as Friven and Co, SunMoon Food Company, as well as The Wine Shop.

Sustainability amid uncertainty. In a time and age when melamine is appearing in milk and financial institutions are imploding, it is a tough call to think of entities worth entrusting our assets to today. However, SingPost is likely to appear on the list of trusted names given its consistent service quality over the years in terms of speed and reliability. It also has a history of paying out about 75-85% of its earnings and 70-80% of its free cash flow every year in the form of dividends since 2004, after its IPO in 2003. This is ideal as we prefer companies with free cash flow payout ratios below 80%, demonstrating that the firm has catered a cash cushion to maintain its dividend payments. SingPost has a dividend policy of minimum S$0.05 per share.

III. Risks
Spectacular capital gains unlikely. SingPost may not be attractive to investors who are looking for spectacular capital gains, given its defensive profile. As it has outperformed the market in the past year, its share price has not plunged as much as others, so investors looking for quick gains are unlikely to be satisfied with SingPost (unless SingPost gives a special dividend when it sells its SPC building when the property market picks up).
Although management is looking at growth drivers across all its business segments, it has singled out direct mail as an area they wish to further develop. It is unlikely, however, that the direct mail market will grow substantially in the short term given the current economic downturn as companies may choose to curtail advertising costs. However SingPost may be able to capture greater market share despite the slower market growth in the short term.
Margins may deteriorate. With new entrants after the liberalisation of the basic mail services market, we expect greater margin pressure. Profit margin for 2Q09 was 31.0%, lower than 33.2% in 2Q08. As such, management will continue to focus on cost management measures to control its costs but we do note that easing inflation should help SingPost mitigate its costs.

Increase in terminal dues. The Universal Postal Union (UPU) has reclassified Singapore as a "target country" (previously known as "industrialized country") from its current category of "net contributor country" for the purpose of terminal dues settlement, with effect from 1 Jan 2010.
Singapore will have to apply the relevant terminal dues system from 2010 to 2013 and contribute to the UPU Quality of Service Fund. All this means that net terminal dues payments (dependent on type and volume of mail, and destination mix) will rise, therefore increasing SingPost's traffic expenses. SingPost said it will apply to IDA for adjustments in postage rates if necessary, but any revisions will require IDA's approval.
Other risks. Terrorist acts happen swiftly and unexpectedly, and such threats should never be disregarded. Postal and express delivery operations may be disrupted by the threat of anthrax attacks or mail bombs, whether real or hoaxes, including other terrorism-related activities. Any such incident could negatively impact SingPost's business and reputation.

Section B: Country Analysis and Macroeconomic Forces
Economic downturn will affect demand. Singapore, being the first Asian country to enter into a technical recession, is expected to contract by as much as 2% in the coming year, according to official estimates. The Economist Intelligence Unit forecasts that Singapore will be among the world's 10 slowest-growing economies in 2009, and sees it contracting by 2.2%. With such a backdrop, SingPost's businesses, especially the mail and retail segments, are likely to be affected as well:

1) Public mail has been decreasingly steadily over the years with esubstitution, while business mail volumes should decline with slower business activity. Direct mail may be impacted by lower advertising expenditure, but SingPost hopes to mitigate its slowdown by capturing greater market share, as discussed earlier.

2) SingPost's retail segment comprises agency services and retail products, as well as financial services such as remittances and unsecured lending. With a weakening real economy, people are likely to curtail their spending and decrease consumption.

Not all segments will be hit. Singapore's increasing foreign population means that foreign remittances could grow, although money remitted home could either rise (family members may need more money with the global downturn) or fall (workers may be retrenched or suffer from pay-cuts).
SingPost revealed that its main customers are from the Philippines and neighbouring countries, while Chinese and Indians form a smaller percentage. Going forward, SingPost hopes to secure more customers in the latter group to sustain the remittance business. SingPost also has six pawnshops under the SpeedCash brand. Pawnshops are normally a reliable bellweather of the state of the economy, as there is usually an increase in business with more people looking for fast ways to get cash during an economic crisis. With the economic downturn and projected rising unemployment, pawnshops are likely to benefit.
Easing inflation may mitigate cost pressures. SingPost has been experiencing cost pressures partly from rising labour costs which make up the bulk (27%) of total operating expenses in FY08. It is unlikely that wage and other costs increases will be substantial going forward given easing inflation in Singapore and the current difficult operating environment which has prompted firms to retrench workers. Fuel costs are also unlikely to spike up in the near future (barring unforeseen circumstances) with lower oil prices in light of the slowing global economy.

Section C: Industry Analysis
As revenue from the mail business made up 77% of total revenue and 81% of operating profit in FY08, we will examine this segment in greater detail.

I. Singapore's postal services sector
Slow growth in total mail volume. According to IDA, while total mail volume in Singapore enjoyed healthy growth in the 1990s, the average growth rate in recent years has slowed to about 2% a year. Despite esubstitution, SingPost experienced an increase in mail volume handled in both domestic and international mail. In the longer term, once the economy picks up, direct mail should be an important growth driver since there is still room for SingPost's business to grow. However, as we weather the current economic downturn, companies are expected to send out less direct marketing mail. As such, mail industry growth is not expected to be spectacular.

Includes domestic letters, postcards, and printed pages sent and received within Singapore, and similar categories of international mail, both inbound and outbound.
Excludes express letters and parcels.
Longest history in Singapore among the five existing firms. Although SingPost was incorporated in Mar 92, its actual history actually dates back to 1819 through its predecessors. Pursuant to a license granted by the IDA in Apr 92, SingPost was the exclusive provider of basic mail services until Mar 07. Swiss Post International Singapore was issued a postal service license only in 2007. The others were issued licenses only in 2008.
Basic mail is the only area of liberalisation. Basic mail refers to letters and postcards, excluding express letters. Under the domestic mail segment, SingPost is likely to encounter increased competition in the direct mail business, although this segment has always been open to competition.
Among the other four postal service operators, it is possible that Swiss Post International (S) and WMG may compete for market share in direct marketing services. International mail (both inbound and outbound) is also likely to face greater competition, as IDA's intention is to develop Singapore as a regional printing hub and enhance e-commerce activities.

Still has some exclusive rights. SingPost is the designated Public Postal Licensee for Singapore, which means only it has access to letterbox masterdoor keys, and the rationale behind IDA's decision is to protect mail integrity in the public postal system and safeguard consumers' interests.
As such, new entrants to the industry either have to utilize SingPost's network or deliver mail door-to-door, limiting pricing flexibility. SingPost will also be the only one to issue national stamps and continue to be the organization representing Singapore at international and regional postal meetings.
Widening network. SingPost has also been increasing its reach to consumers over the years. Its postal network comprises post offices, stamp vendors, SAMs and postboxes. Given the nature of the business where convenience and easy access are among the main priorities of the customer, SingPost's vast distribution network ensures that it has the competitive advantage.
Degree of competition. Potential competitors are unlikely to compete aggressively in the domestic mail market considering that they have to utilize SingPost's access network since they do not hold the masterdoor keys. As such, there is limited pricing flexibility. There could be more competition in the international mail market but SingPost also has a joint venture (Spring, set up in 2001) with TNT Post and Royal Mail for the crossborder mail business. As for logistics, SingPost has admitted that this is a highly competitive business but the group said it has performed well in the past year by expanding its customer base in a variety of industries.

II. Global postal services sector
Postal service operators not spared. The financial crisis has affected postal service operators around the world, including the United States Postal Service (USPS), the biggest postal service in the world. The group posted a net loss of US$2.8b for FY08, partly due to a 9.5b decline in mail volumes to 202.7b pieces. The UK's Royal Mail has also said that its operations "face additional risk from the squeeze in the UK economy" and from businesses' and individuals' cost-cutting measures.
State of the worldwide postal sector. The postal sector is still very much relevant and certain sectors are expected to grow. According to the UPU, while growth in urgent mail is stagnating in industrialized countries, there is still "tremendous growth potential" in emerging countries. Direct mail is growing in both developed and developing countries. New technologies can be utilized as means of increasing the interconnectedness among countries and further integrating the postal offices around the world, therefore increasing the points of access for ordinary citizens.

Section D: Company Analysis
I. Business overview
SingPost has three main operating divisions: mail, logistics and retail. In the latest 2Q09 results, mail accounted for 72% of total revenue, while logistics and retail made up 15% and 13% respectively.

Public Mail
Public mail consists primarily of stamped mail and franked mail. Stamped mail is sent mainly by individuals and consists letters and postcards (excluding express letters). Volumes have been declining due to substitution by email and the Internet. Franked mail is used primarily by home offices and SMEs as a method of mailing large quantities of mail of different weights and sizes. Volumes have been declining as franked mail customers upgrade to bulk mail.

Bulk Mail
Bulk mail consists of publications, direct mail, and government and business mail. It is used as an efficient means of distributing large quantities of homogenous mail such as invoices and promotional mailings. Processing and delivery times are reduced as the customer's items and postage rates do not have to be weighed and calculated individually.

Hybrid Mail
More bulk mail is being outsourced for printing and mailing as companies focus more on their core businesses and competencies. Main customers include financial institutions, telecommunications companies, and government bodies, among others.

International Mail
There is increasing competition in the international mail market as new competitors enter previously regulated markets in the world. International mail volumes are also likely to be hit by the global economic slowdown.

Philatelic
SingPost produces commemorative and special stamps as well as other collectibles for tourists and the gift market.

Speedpost
Speedpost is a door-to-door express delivery service for documents, parcels and freight. Speedpost Islandwide is a service within Singapore, Speedpost Worldwide provides international deliveries, while Speedpost Freight transports large or heavyweight shipments.

Warehousing, fulfillment and distribution
This is a complement to Speedpost and provides business customers a one-stop logistics service. Fulfillment services include item collection, wrapping, payment collection, shipping and invoicing.

vPost (shop and ship)
vPost is SingPost's online portal that offers a range of services including shopping and shipping. Currently, customers can purchase items from certain countries in the world and have them delivered to their doorstep.

Retail
SingPost sells a wide variety of postal and non-postal products including packaging and stationery items. Customers can also pay their utility bills, taxes, fines, license fees and other contributions as organizations outsource payment administration to SingPost.
Under financial services, remittances and unsecured lending made up the bulk of this segment's revenue while post-assurance and secured lending accounted for the rest. With the credit crunch and economic downturn, SingPost's lending business may improve as banks tighten their lending.

II. Competitive positioning and corporate strategies
Emphasis on quality. Instead of merely relying on a cost leadership model, SingPost places great emphasis on service quality and worker productivity.
In FY08, SingPost continued to surpass the Quality of Serivce in mail delivery set by the IDA by achieving more than 99% delivery by the next working day for mail posted within and outside the Central Business District (CBD).
The group also achieved international recognition in the World Mail Awards (Quality category) on the basis of increased productivity, discounts to customers, lower incidence of damage and improved sorting accuracy and delivery.
Productivity increases. Postman productivity has also increased from 2,923 to 3,130 items delivered per postman per effective man-day in FY08, while productivity of mail processing officers grew from 5,765 to 6,307 items sorted per processing officer. Going forward, SingPost aims to pursue further efficiency improvements.

More effective direct mail. SingPost also has a competitive advantage based on its extensive network and proprietary database. SingPost's updated data repository and clear understanding of the whereabouts of the target audience is important in increasing the effectiveness of direct mail, as mail can be sent to targeted customer segments. This increases the response rate and cuts unnecessary spending for the corporate partner.
One-Stop-Shop service. SingPost is able to provide a one-stop service for its customers through its mail, logistics and retail divisions. The group has diversified its operations in the past few years with forays into remittances and lending services, among others. New initiatives and joint ventures have been undertaken as well, and the following exhibit illustrates some in the past 3 years.

III. SWOT analysis table
The strengths, weaknesses, opportunities and threats with regards to SingPost have been discussed in earlier parts of the report, but just to recap:

Key JVs and initiatives in the past three years
15 Dec 08 Launched A.M. Mail Time-certain service that delivers mail by 11am the next working day
20 Oct 08 Termination of JV JV with GPN International and Oce
19 Sep 08 Added new remittance channel New channel to the Philippines through the Philppine National Bank
29 Apr 08 Collaboration with ABN AMRO SingPost will distribute ABN AMRO's line of credit, PostLine
28 Mar 08 Launched Asian property sercurities fund Collaboration with Prudential
5 Feb 08 Offered the SingPost Visa Money Transfer service First postal service provider in the world to offer Visa remittance service
22 Jan 08 New remittance service to Indonesia Collarboration with PT Bank Negara
23 Jul 08 Launched Dmrocket one-stop specialist Direct Mail service
2 Jul 07 JV with Thai British Security Printing Set up JVC to provide laser printing and enveloping statements, bills etc
4 May 07 Cooperation agreement with Hongkong Post Provide data printing, enveloping and other services
3 May 07 JV with GPN International and Oce To engage in the business of Print-On-Demand
23 Nov 06 Collaboration with Pos Indonesia Four initiatives on channelling services, remittances, logistics and direct mail
14 Nov 06 Established unit trusts distribution partnership Collaboration with Prudential Asset
29 Sep 06 Launched PostREALTY Collaboration with ERA Realty Network of Hersing
23 Jan 06 Launched Speedpost Express Premium express courier service with DHL as a partner

Strengths Weaknesses
A. Dominant position in postal services industry
B. Stable operating and free cash flows
C. Able to leverage on wide distribution network
A. Slow growth in mail volume, the mainstay business
B. Limited upside for postage rates which is also subject to IDA's approval

Opportunities Threats
A. New initiatives and diversification of services to present more opportunities
B. Potential boosts from assets
C. Direct mail a market worth focusing but may be affected in this downturn
A. Pricing pressures from increasing competition
B. Higher expenses from terminal dues revision
C. Economic downturn to affect demand

I. Financial performance and forecasts
Good 2Q09 results. In SingPost's latest 2Q09 results, group revenue grew by 4.1% YoY to S$120.7m with improved performances in all three business segments. Mail revenue rose 2.8% on the back of higher contributions from domestic, international and hybrid mail, as well as the philatelic business.
Logistics revenue increased by 6.4% due to growth in Speedpost, vPost shipping transactions as well as warehousing, fulfillment and distribution.
As for retail, revenue rose by 8.6%, driven by financial and agency services. The group's rental and property-related income grew by 39.3% to S$8.2m, boosted by higher rental income from its headquarters, the SPC.
Forecasts. We are estimating a 2.5% growth in revenue in FY09, followed by a 2.0% contraction in FY10. To recap, SingPost's revenue was flat in the Asian Financial Crisis (1997/1998) but fell by 2% during the SARS period (2003). As the property and rental market weakens, we are unlikely to see a similar increase in SingPost's rental and property-related income as compared to FY08. The leases in the SPC are staggered, and about one-third of them come up for renewal every year. A check with SingPost also confirmed that lease rates are softening. Margins are prone to downward
pressures with new entrants in the industry but management said it will continue to focus on cost management measures. Easing inflation is likely to help SingPost in this area as well.
Bonds are the only borrowings. SingPost's only borrowings is its unsecured bonds of principal amount S$300m listed on the SGX-ST. The maturity period is 10 years from 11Apr 03 with fixed interest rate of 3.13% per annum. This translates to a debt-to-equity ratio of 1.3 as of Sep 08.
There is solid cash flow protection due to its strong operating cash flows(operating CF: S$173.7m, FCF: S$160.9m in FY08). Interest coverage using EBIT/Interest gives a ratio of 16.1.

II. Valuation and recommendation
Upside potential with low refinancing risk. In view of its stable cash flows, we value the group on a discounted free cash flow to equity basis (8.8% cost of equity, 2% terminal growth), deriving a fair value estimate of S$0.93. We have adopted a beta of 0.8 instead of Bloomberg's 0.6 for a more conservative cost of equity. As our sensitivity analysis shows, even with a higher cost of equity at 9.0% or lower terminal growth of 1.5%, SingPost still has an upside potential sufficient for a BUY call. SingPost has little capital expenditure (less than 5% of revenue every year, and has been 2-3% historically) and its defensive business and strong cash flows
means it has little refinancing risk.

Initiate with BUY. We initiate coverage on SingPost with a BUY recommendation with a fair value estimate of S$0.93. We like SingPost for its stable operating cash flows and dividend yield, and we think its defensive profile will serve it well during this period of economic uncertainty. Although mail volume growth may be crimped with a slowing economy and esubstitution, SingPost has launched new initiatives over the years and diversified into other business areas to pursue growth. SingPost is also asset rich, and there is always the possibility of unlocking asset values though this may be unlikely in the near future with a weakening property market. SingPost has a dividend policy of minimum S$0.05 per share a year, implying at least a 6.3% yield. Assuming SingPost continues its S$0.0625 dividend per share in FY09, this imply a 7.9% yield, which is attractive given its defensiveness.