SingPost

Kim Eng on 31 Jan 2012

Strong sequential growth but still falling short. SingPost’s 3Q12 revenue came in flat at $149.4m; underlying net profit dipped 5% YoY but grew 18.5% QoQ to $38.9m. Despite the sequential improvement, profit year-to-date falls short of our expectations. Operating margins will not improve significantly in the near term due to further spending on capabilities. Our FY12F/13F earnings estimates are lowered by 5-6%, and target price reduced to $1.09. Maintain Buy on steady minimum dividend yield of 5% (total return: 16.2%).

Cost pressures still in sight. Operating profit margin, currently at 30.5%, is down 8 ppts from 3Q11 mainly due to lower margins from its transshipment business and rising labour costs. It appears margins are not likely to improve significantly despite cost-cutting measures such as lower provisions for bonuses, as Mr Wolfgang Baier, CEO since October 2011, has committed to investing in capabilities and talents to accelerate SingPost’s regionalisation efforts.

Unattractive yield on regional investments so far. The share of associated companies’ profits surged, from losses in 3Q11 to a $1m profit in 3Q12. Based on SingPost’s investments of around $65m to date, the estimated yield of 6.2% on an annualised basis suggests the risk-reward dynamics of these investments are rather unattractive, especially since its own dividend yield is higher at 6.4%. This also implies there is potential for more share buybacks by the company.

Counting on dividends. Free cash flow for the fiscal year to date has reached around $75m (annualised FCF yield: 5.4%), just sufficient to cover the group’s minimum dividend commitment of 5 cents per share (or $94m in total). SingPost has maintained a dividend payout of 6.25 cents per share since FY08, translating to a regular dividend yield of 6.4%.

Maintain Buy on valuations. We roll forward our target price to end-CY12, using a blended FY12/13F earnings estimate and a historical average PER of 14x. The key risk lies in a potential cut in dividends should management deploy more cash for investments, though chances seem low as management is willing to take on more debt (up to 2x gearing).