DBS Vickers: Singapore Post - 6 Feb 2008

Potential HQ Sale is the upside

Story: According to Business Times headlines today, Singpost may sell its HQ building which is estimated to be orth S$1.0b - S$1.3b. Although the company declined to comment, if this comes true, the sale should result in a bumper dividend yield.

Point: Investors can expect dividends of 23-45 cents per share if HQ sale takes place, assuming 50%-80% payout of sales proceeds. We think that that 20%-50% of sales proceeds could be used to make acquisitions to drive growth, which management highlighted recently.

Relevance: Upgrade to BUY with a target price of S$1.35 based on breakup valuation. We prefer Singpost for its stable operations with over 6% in regular dividends and HQ sales as potential catalyst. Even if HQ sales do not materialize in the near term, downside risk is limited due to its healthy dividend yield.

Potential value of HQ building is 45-57 cents per share. The book value of HQ building is around S$300m. Assuming that HQ building can be sold for S$1.0-1.3b, it would result in divestment gains of S$700m-S$1b. With 18% tax rate on divestment gains, the cash generated from sale of HQ works out to be S$874m – 1120m or about 45 - 57 cents per share.

Fair value of Singpost without HQ building is 85 cents per share. We need to take out the rental income of S$21.5m from HQ and add the rental expenses of S$21.5, which Singpost would have to pay for its own office space. As a result FY09 net income would be lowered by 28% to S$110m. If we value this business at similar 15x earnings, it works to be S$1.65 billion or 85 cents a share.

Fair value of Singpost with HQ building. If we add the two parts together, the total value of the company would be S$1.30 – S$1.42 per share.

Major Shareholders: Singapore Telecommunications 25.7%, Capital Rsch Mgmt 5.0%.

CIMB-GK Securities: Singapore Post - 31 Jan 2008

Rising Headwinds

• In line. SingPost’s 3QFY08 earnings of S$36.8m (+7.9% yoy) were in line with consensus and our estimates. 9MFY08 earnings form 77% of our FY08 earnings estimate. This was a satisfactory set of results with topline and margins coming in within expectations. A DPS of 1.25 cts was also within expectations. Key highlights were: 1) sustained cost pressure; and 2) rising competition from the ongoing liberalisation of the postal system.

• Decent revenue growth. Topline growth (+9.2% yoy) was driven by direct mail (+28% yoy) on the back of a robust domestic economy. Logistics grew 5.3% yoy on increased Speedpost traffic and growth in vPOST online shopping transactions. Retail revenue grew 7.9% yoy as growth in financial services (+16.4% yoy) was offset by a continued decline in agency/bill presentment services.

• But margins were eroded. EBIT margins declined 90bp yoy to 37.8% on the back of rising costs (labour and volume-related) as well as the product mix (faster growth of lower-margin direct mail business). We also note sustained pressure on agency/bill presentment services which overwhelmed gains from financial services. We expect the margin pressure to mount from ongoing liberalisation of the postal system.

• Trimming earnings estimates. We maintain our FY08 earnings estimate but trim FY09-10 estimates by 2-3% to reflect margin pressure from higher labour costs as well as impending competition from liberalisation of the postal system. Our earnings downgrade is buffered by our expectation that SingPost will be able to offset some margin pressure through productivity improvements.

• Downgrade to Neutral from Outperform with lower target price of S$1.20 (previously S$1.41). Our DDM-based target price has been reduced for two reasons: 1) a higher cost of equity of 7.2% from 6.5% previously on evidence of higher earnings risk from sustained cost pressure, substitution as well as impending competition; and 2) our earnings downgrade. The stock lacks catalysts in the near term and we are unconvinced that management will unlock value from the Singapore Post Centre anytime soon. Nevertheless, downside should be limited by a dividend yield of over 6%.