Singapore Post - Robust 1QFY08 earnings for an attractive dividend play

SingPost reported 1QFY08 net profit of S$38.4m, up 24% yoy. This represents
26% of our FY08 forecast. Excluding one-time items, underlying net profit was
up 14.9% yoy. Revenue rose 10% yoy.
Robust growth for mail. Mail revenue rose 10.9% (or S$9m) yoy, and
accounted for 75% revenue share, due to mail volume increasing 9.6%. This
came on the back of a strong 11.4% rise in bulk mail (compared with a weak
1.6% for public mail), due to a) Direct Mail’s increase of 10.9%, partly due to
one-off contributions from mailing of GST Offset packages, service and
conservancy charges notices and Dengue Fever letters (8% growth excluding
these one-offs); and b) business and others increasing 11.7%. Correspondingly,
mail operating profit rose 14.3% yoy.
Financial services drove retail segment. Retail revenue rose 10.6% (or
S$1.4m) yoy, and accounted for 12% revenue share. Financial services
revenue surged 51.8%, and accounted for 3.5% of overall revenue –
remittances, EzyCash were star performers, and insurance sales are also
picking up.
Underlying operating margin improved from 1QFY07’s 37% to 37.7%, due
to mail, logistics and retail operating margins widening from 1QFY07’s 39.5%,
12.5% and 14.1% respectively to 40.7%, 13.0% and 14.4% respectively.
Robust cashflow generation. Net cash inflow from operating activities was
S$49.4m, up from 1QFY07’s S$36.5m. Capex was a low S$2.5m, or 2% of
revenue. Management expects the low capex to be maintained for subsequent
quarters.
Dividend yield stays high. SingPost declared an interim dividend of 1.25¢ ps.
SingPost aims to pay out 80-90% of net profit or a minimum of 5¢ ps per annum.
We are forecasting 6.5¢ ps total dividends for FY08 (based on 83% payout
ratio), giving a yield of 5.2%, which is higher than 3-mth SIBOR of 2.6%.
SingPost remains a BUY. Our FY08 net profit forecast has factored in the
increase in postage rates effective 18 Dec 06 and 1 Jul 07, as well as the onetime
gain from sale of Clementi Central HDB shop unit. Management indicated
that SingPost owns 15 post office premises (others are leased), and these could
potentially be sold if SingPost decides to relocate its branches (due to
operational reasons). SingPost is attractive based on our DCF valuation of
S$1.43 per share – we have assumed a terminal growth rate of 0.7%, a WACC
of 5.7% (which factors in cost of debt of 4.6% and cost of equity of 7.7%).