Singapore Post - We have raised terminal growth rate assumption

The strength of the Singapore stock market could translate to more robust
economic growth and correspondingly raise the volume of mail handled by
SingPost. We are therefore raising our terminal growth rate assumption for
SingPost from our previous 0.5% to the current 0.7%.
We are particularly optimistic on financial services, which recorded a 88.6%
jump in FY07 revenue, and accounted for 3.4% share of FY07 overall revenue.
EzyCash, which accounted for 40% of financial services revenue, is seen to
remain a key driver with continued optimism on the economy. CPF data showed
that 36.7% of CPF contributors have monthly wage of between S$1.5k and
S$3.0k, and this is the target group for EzyCash. We believe the strong
economy will help drive demand for EzyCash loans, more than offsetting the
weakness from the impending opening of the market segment to commercial
banks.

We believe SingPost’s core mail business (77.6% share of overall revenue) will
also show good growth with the more robust economic growth expected. Mail
business expansion will also help to widen mail operating margin, from FY07’s
39.8%.
Based on our new assumptions of 0.7% terminal growth rate, 5.7% WACC
(derived from risk-free rate of 2.8%, market risk premium of 7.9% and cost of
debt after tax of 4.6%), our DCF valuation gives a fair value of S$1.43 per share,
which we adopt as the price target.
SingPost aims for a dividend payout ratio of 80-90% of net profit, or a minimum
of 5¢/share per year. We are forecasting FY08 dividend of 6.5¢, or a payout
ratio of 85%. The resultant 5.2% dividend yield is attractive. The recently
declared 2.5¢ final dividend is going ex-dividend on 3 Jul 07. Maintain BUY on
SingPost.