Extracts fm Lim and Tan report dated 1-Nov-06, 

More Patience Needed

• Excluding the $4.8 mln profit from the sale of a non-core property, Sing Post’s profit for Q2 ended Sept ’06 rose 4% to $31.3 mln. All divisions contributed to this, with Retail Division registering the sharpest increase.
  
• Quarterly dividend is maintained at 1.25 cents per share, yielding 5% net with the stock at $1.00. This is amply justified by the robust cash flow, of $74.6 mln in H1, up a solid 21% from $61.6 mln in the same period the year before.

COMMENTS

1. The stock has been under some pressure since the IDA released the Consultation Paper on Further Liberalization of the Postal Services in August. SingPost’s exclusive license for basic mail services (letters and post cards) expires on March 31st ’07.
   
2. This is unlikely to be lifted until
   
   
   
   • the deregulation issue; and
     
   • fate of Sing Tel’s remaining 26% stake, are out of the way. (Sing Post has submitted its feedback to the IDA, which, we expect, will make public its decision well before March 31 ’07.)
   
   
3. We have expressed our “sanguine” views on the subject previously, and maintain the yield is attractive enough to continue to justify BUY.

2QFY07 : Financial services remains the star growth segment

SingPost reported 2QFY07 net profit of S$36.1m. Underlying net profit of S$31.3m, which excludes the S$4.8m gain on sale of a non-core property, was up 4% yoy, and in line with expectations.

Revenue rose 3.5% yoy to S$106.6m. Revenue from the retail segment, which rose 14.1% yoy, now represents 12.5% of total revenue, up from 2QFY06’s 11.3%. Financial services, which comes under the retail segment, recorded a 105% yoy surge in revenue. 80% of financial services revenue came from remittances and EzyCash. Mail recorded a mild 1.7% yoy revenue expansion, due to growth in direct mail, mailroom management activities and higher outgoing international mail volumes, and accounted for 73.3% of total revenue. Logistics revenue, on the other hand, was up 2.7% yoy, on the back of increased contributions from Speedpost.

Retail segment drove operating profit expansion. Although the mail segment accounted for the lion share of 72.3% of operating profit, growth was weak at only 3.9% (S$2.5m) yoy. Once again, the retail segment was the star contributor to operating profit, rising 60.2% (S$1.5m) yoy, with increasing contributions from higher-value financial services. Management indicated that steps have been taken to keep expenses low, which led to expenses rising a mild 2.8% yoy.

Robust cashflow generation. 1HFY07 net cash inflow from operating activities was S$74.6m, versus S$61.6m in 1HFY06. With the strong operating cashflow, as well as low capex needs (capex estimated at less than 5% of revenue), SingPost made a partial S$20m repayment of the S$60m term loan.

Although SingPost’s net debt to equity ratio of 1.7x may appear high, its interest coverage of 16.9s is at an acceptable level.

Dividend yield remains high. An interim dividend of 1.25¢ was declared. Based on a payout ratio of 85% (management is guiding payout ratio of 80-90%, with a minimum of 5¢ ps), we are forecasting FY07 dividend of 6¢. This gives a dividend yield of 6%, which is attractive when compared against 3-mth SIBOR of 3.5%.

With regards to the 31 Mar 07 expiry of the exclusive right of SingPost for Basic Mail Services (letters and postcards), SingPost management sees itself as well positioned to address the challenges of postal deregulation.

We have raised our FY07 net profit forecast by 4.7% to S$134m primarily to factor in the one-off gains from property sale. Our FY08 and FY09 net profit forecasts have also been finetuned.

SingPost remains a BUY. Despite our mild earnings growth forecast of midsingle digit pa, SingPost remains attractive based on our DCF valuation of S$1.23 per share. The 6% FY07 dividend yield and undemanding FY07 PE ratio of 14.2x will also support share price.

Moving into the property transaction business

SingPost and ERA Realty Network of Hersing Corporation have signed an agreement to offer a new service to customers. Known as PostREALTY, this one-stop service is a convenient and reliable new channel for customers to buy, sell and rent public and private residential and commercial properties at post offices.

This service will initially be offered at three of SingPost’s branches, namely Ang Mo Kio Central Post Office, Marine Parade Post Office and Toa Payoh Central Post Office from 16 Oct 06 (SingPost currently has 62 branches). A dedicated team of service staff from ERA Realty Network will be stationed at these post  offices to assist customers with enquiries and property transactions.

We view this partnership positively, as SingPost has tied up with a leader in the business. ERA Realty Network currently enjoys leadership position in HDB resale transactions and private resale market, capturing an estimated 35% of the market.

More importantly, this partnership reinforces SingPost’s diversification strategy to leverage its wide retail network to offer more value-added products and services. We can expect SingPost to announce more of such similar initiatives in future.

Market concerns are unwarranted. Some market players are concerned that the impending opening of the low-income (<S$30k per annum) unsecured lending market to commercial banks will mean more competition for SingPost’s EzyCash. We feel likewise too. However, it should be noted that the retail segment accounts for only 4.5% of FY06 operating profit, and EzyCash is but one portion within the retail segment. Hence, we believe the impact on SingPost’s earnings will not be significant.

The other concern of market players is that the exclusive postal licence will expire on 31 Mar 07. Our view is that other players are unlikely to enter into a market which is relatively small, and compete with SingPost which has an elaborate postal infrastructure setup. Hence, we expect minimal impact on postal earnings upon expiry of the exclusive licence.

Divestment of non-core assets progressing. Separately, SingPost announced that it has completed the sale by tender of its HDB shop unit at Marine Parade Central. The net book value of the property is S$0.83m, and the sale price is S$5.68m, giving a gain on disposal of S$4.78m.

SingPost remains a BUY. Our DCF valuation gives a fair value of S$1.23 per share. Based on a dividend payout ratio of 89% (management guided payout ratio of between 80-90%), we are forecasting FY07 dividend of 6¢, translating to a dividend yield of 5.9%. This is very attractive when compared against 3-mth SIBOR of 3.4%.

Speedpost, warehousing, fulfillment and distribution. Retail business registered a strong growth of 15.6% from S$11.4 million to S$13.2 million in the first quarter. This was attributed to increased contributions from financial services, Retail products and vPOST mail-order transactions, which offset the decline in agency/bill presentment revenue.

SingPost will continue to drive growth in its core businesses by pursuing and implementing initiatives in direct mail, mailroom management, MyStamp and Speedpost Express. It will also focus on rolling out higher value products and services to its customers.

Extracts fm CSFB Report dated 14-Dec-05, 

• Having geared up to 180% to pay its special dividend, we think that one of the remaining capital management exercises that SingPost could do is to securitize Singapore Post Centre (SPC).
  
• Using the commercial benchmark of a 5% cap rate, we believe the market will pay S$453 mn for SPC, but as SingPost has to pay a 10% caveat to HDB, it will only receive S$408 mn. 
  
• But if SingPost hangs on to SPC, it stands to reap S$451 mn in rental (discounted at a similar 5% WACC).
  
• Hence, we believe SingPost is unlikely to securitize SPC, which reinforces our NEUTRAL rating. We do not expect its gearing to drop below 100% until 2009, and short of securitizing SPC, we do not see further positive triggers in the near term. Valuations are not cheap at 17-18x PE, but we see support from the 5% yield.
  
• For more interesting plays on capital management, we will prefer SingTel or StarHub.

Extracts fm CIMB Report date 31-Oct-05,

Surprise in the post

• Above expectations. SingPost reported a strong set of 2Q06 operating results. Excluding exceptional gain of S$3.7m last year and the impact of lower depreciation charges after the extension of the useful lives of certain assets, net profit still grew 9% yoy to S$28m. This came on the back of double-digit revenue growth from all business segments, partially offset by higher direct expenses and interest cost. Cashflows remained strong, with 1H06 net operating cashflow up 31% to S$62m, from S$47m a year ago. 
  
  
• Financial services gaining traction. Retail revenue rose strongly by 18% yoy in 2Q06, mainly due to growing contributions from financial services, product launches/promotions such as the Harry Potter book launch. Mail revenue grew by 10% yoy to S$79m, driven by international mail (+17% yoy). Within domestic mail, SingPost has successfully grown its direct mail business, which rose 7% yoy in volume to help offset the volume decline in public mail. Logistics revenue increased by 20% yoy to S$15m, due to higher Speedpost traffic, new customers and the fuel and security surcharge implemented since Dec 04. 
  
  
• Surprise dividends; target price raised to S$1.25 ex-dividend. SingPost is declaring a special dividend of 10 cts per share (S$191m) on top of its regular quarterly dividend of 1.25 cts, to optimise its capital structure. This will raise its gearing level from 0.4x to 2x (by Mar 06), but should not pose a problem to its interest servicing ability with its expected strong cashflows. We are raising our EPS estimates for FY06-08 by 2-10%, and believe net profit should still grow by 5-6% in FY07-08 even after factoring in potential higher net interest costs. Its WACC is now lower as it replaces higher-cost equity capital (over 8%) partially with lower-cost debt (around 3%). With continued growing operating cashflows and a lower cost of capital, our new DCF-based price target is raised to S$1.25 (ex-div, WACC of 5.4%) from S$1.12. With a total return of 22% including the announced dividends, maintain Outperform.

SINGAPORE (Dow Jones)--Swiss Post, Switzerland's dominant mail operator, is buying its Singapore-based franchisee as part of a plan to increase its presence in the Asia-Pacific region. "Singapore is a key market for us, and we are committed to further expanding our reach in this region by using Singapore as a gateway," Swiss Post's chief executive, Ulrich Gygi, said in an interview Friday. Gygi declined to say how much Swiss Post is paying its former Singapore franchisee.

Swiss Post expects to complete by year-end the takeover of Singapore-based SPI Mail International Pte. Ltd., providing the Swiss firm with a direct presence in Singapore, Malaysia and Hong Kong. The company will then focus on expanding into new markets including China and Thailand, Gygi said. Swiss Post has also signed direct entry and international mail agreements with Singapore Post Ltd. (S08.SG) and Pos Indonesia to enhance its distribution network in Asia, he added.

Swiss Post's Asian operations will focus on delivering letters and small parcels on behalf of companies in the region, with services including mass mailing, management of mailing lists and other data, and the insertion of letters, brochures and magazines into envelopes. In future, the Asian operations may also provide consultancy services in the region, which Swiss Post already does in Eastern Europe, added Daniel Baettig, chief financial officer of Swiss Post International.

Swiss Post won't compete directly with companies like Fedex Corp. (FDX) and United Parcel Services Inc. (UPS) in Asia, as the latter are courier services and are relatively new entrants in the mail business, Gygi said.

Swiss Post's moves come as former national postal monopolies face increasing competition, not just from specialist mail and courier companies but also the use of the internet to deliver mail and documents, Gygi said. The key to survival, he said, is to protect the domestic market by offering high quality services while being innovative in providing new products and services, including those in the electronic arena. Next year, Swiss Post will introduce electronic registered mail, which will involve electronic signatures, encryption and the use of electronic keys to identify users of the system.

Swiss Post operates a network of about 2,700 post offices across Switzerland, offering delivery services as well as payments collection and financial products such as savings accounts, mortgage lending and mutual funds. Its other businesses include Switzerland's largest online search engine, search.ch.