MITA No. 013/06/2008
Please refer to the important disclosures at the back of this document.
S I N G A P O R E Company Report
2 January 2009
Initiating Coverage
BUY
S$0.795
Fair Value: S$0.93
Stock Code:Reuters: SPOS.SIBloomberg: SPOST SPISIN Code S08
Event: Initiate Coverage
General Data
Issued Capital (m) 1,926
Mkt Cap (S$m/US$m) 1,531 / 1,064
Major Shareholder
SingTel (25.7%)
Free Float (%) 74.2
NTA per share (S$) 0.118
Daily Vol 3-mth (‘000) 4,079
52Wk High (S$) 1.180
52Wk Low (S$) 0.795
Singapore's established postal services operator. Singapore Post
(SingPost) is the designated Public Postal Licensee for Singapore. It
provides domestic and international postal services, and is also a logistics
provider in the domestic market with global service offerings to more than
220 territories/countries. Leveraging on its retail distribution network,
SingPost also provides agency and financial services. In 1H09, the group
achieved a 4.3% YoY rise in revenue to S$241.6m but incurred a 1.5% fall
in net profit to S$76.9m. Excluding one-off items, underlying net profit was
higher by 11.5% at S$77.7m.
Should remain dominant despite liberalisation. Despite the
liberalisation of the basic mail services market in Apr 07, SingPost is still
in a strong position to remain as the dominant postal services operator.
Only it can hold the masterdoor keys to letterboxes provided by property
owners and developers, including those in HDB estates, as dictated by
the Info-communications Development Authority (IDA). With other
advantages like an established distribution network, significant free cash
flow, a monopoly over stamp issues and an entrenched brand name, we
believe that the liberalisation should have limited impact on SingPost.
Defensiveness amid uncertainty. SingPost has stable operating and
free cash flows given the nature of its business. It has also been increasing
its dividend per share since its IPO in 2003 to S$0.0625 in FY08. With the
uncertainty in today's stock markets, its earnings are comparatively
defensive. Although mail volume growth may be affected by e-substitution
and the slowing economy, SingPost has undertaken proactive measures,
as evidenced from its launched initiatives and diversification of services.
Initiate with BUY. The defensive nature of SingPost's business and its
dominant market position renders it an attractive investment. Its proactive
measures demonstrate its resolution to safeguard its profits, making it an
even more compelling stock. Moreover, with a long list of properties under
its name, SingPost may be able to unlock asset value when the time is
ripe. We initiate SingPost with a BUY recommendation and S$0.93 fair
value, derived from the free cash flow to equity approach (cost of equity
8.8%, terminal growth 2%). SingPost has a dividend policy of minimum
S$0.05 per share a year, implying at least a 6.3% yield. Assuming SingPost
continues its S$0.0625 dividend per share in FY09, this would imply a
7.9% yield, which is attractive given its defensiveness.
In Post We Trust
Singapore Post Ltd
Low Pei Han(65) 6531 9813
e-mail: [email protected]
Year to Turnover EBITDA Net Profit EPS EPS Growth PER Net Div Yield
31 Mar (S$m) (S$m) (S$m) (cents) (%) (x) (%)
FY 07 436.0 168.2 139.8 7.3 - 10.9 6.9
FY 08 472.6 174.3 149.3 7.8 6.4 10.2 7.9
FY 09F 484.3 170.0 152.7 7.9 2.1 10.0 7.9
FY 10F 474.7 158.5 145.7 7.6 -4.6 10.5 7.9
Page 2 2 January 2009
Singapore Post Ltd
Table of Contents
Page
Section A Investment Case 3
I. Background in brief
II. Investment highlights
III. Risks
Section B Country Analysis and Macroeconomic Forces 9
Section C Industry Analysis 11
I. Singapore’s postal services sectorII. Global postal services sector
Section D Company Analysis 16
I. Business overiewII. Competitive positioning and corporate strategiesIII. SWOT analysis table
Section E Financial Analysis 22
I. Financial performance and forecastsII. Valuation and recommendation
Page 3 2 January 2009
Singapore Post Ltd
Section A: Investment Case
I. Background in brief
Singapore Post (SingPost) is the designated Public Postal Licensee for
Singapore. It provides domestic and international postal services, and is
also a logistics provider in the domestic market with global service offerings
to more than 220 territories/countries. Leveraging on its retail distribution
network with its post offices, self-service automated machines (SAMs)
and vPost, its internet portal, SingPost provides not only postal but also
agency and financial services.
II. Investment highlights
Dominant postal services operator. SingPost has been, and still is, the
dominant player in the postal services industry in Singapore. Although the
basic mail services market was liberalised in April 2007, SingPost still
holds the masterdoor keys to letterboxes provided by property owners and
developers, including those in HDB estates. As such, new entrants to the
industry either have to utilize SingPost's network or deliver mail door-to-
door, limiting pricing flexibility. With other advantages such as an established
distribution network, significant free cash flow, a monopoly over stamp issues
and an entrenched brand name, we believe that the liberalisation should
have a limited impact on SingPost.
Defensiveness amid uncertainty. We like SingPost for its stable operating
cash flows given its non-cyclical business. Historically, SingPost has
weathered economic downturns well, with flat revenues during the Asian
financial crisis and a marginal 2% fall during the SARS crisis. This is
especially relevant now given that the world is probably experiencing the
worst slump since the Great Depression, with companies going through
tough times in the face of falling demand and drying credit lines. SingPost
has stable operating cash flows (Exhibit 1), a strong balance sheet and
dominant market position. Management has reiterated its dividend policy
of a minimum of S$0.05 per share each year. Such factors render it an
attractive stock given the current volatile market conditions. SingPost has
also outperformed the general market over the past year in terms of share
price, excluding dividends (Exhibit 2).
Page 4 2 January 2009
Singapore Post Ltd
Exhibit 2: Share price performance
Source: Bloomberg
Exhibit 1: Stable operating and free cash flows
* Free cash flow (operating cash flow less cash capex)
Note: Chart excludes additional special dividend of S$0.10 per share paid out in FY06
Source: Company data
0
50
100
150
200
FY04 FY05 FY06 FY07 FY08
S$m
il0
1
2
3
4
5
6
7
S cents
Operating CF FCF* Div idend per share (RHS)
0
20
40
60
80
100
120
Jan
08
Feb
08
Mar
08
Apr
08
May
08
Jun
08
Jul
08
Aug
08
Sep
08
Oct
08
Nov
08
Dec
08
FSSTI SingPost
Page 5 2 January 2009
Singapore Post Ltd
Opportunities for growth. SingPost has been launching new services
and initiatives over the past few years, and latest ones include "ClickPost",
an internet-enabled one-stop mailing solution for customers and "A.M. Mail",
a time-certain service that bridges the gap between express mail and regular
mail. It has also leveraged on its wide retail network via partnerships with
companies such as GE Money, ERA Realty and Prudential. Direct mail
(junk mail) is a segment that SingPost is targeting for growth by capturing
a bigger slice of the advertising market share. According to SingPost, its
current share is 4-5% of the Singapore market, while counterparts in
developed countries such as the UK enjoy about 14% of their country's
market share. SingPost therefore believes it has potential to grow in this
area.
Potential boosts from assets. SingPost is able to unlock value from its
properties, and management has previously expressed interest in selling
its flagship building, the Singapore Post Centre (SPC), next to Paya Lebar
MRT Station. The group has also been selling some of its smaller properties,
such as HDB shop units at Boon Lay Place and Clementi Central for S$2.8m
and S$7.9m respectively. Though there are potential capital gains to be
reaped from such asset sales, the likelihood of more sales, especially that
of SPC, could be lower given the weakening property market. SingPost is
also repurposing some of its post offices such as its Tanglin Post Office
which has been converted into a lifestyle hub with tenants such as Friven
and Co, SunMoon Food Company, as well as The Wine Shop.
Page 6 2 January 2009
Singapore Post Ltd
Exhibit 3: List of major properties
* All are leasehold properties
Source: Company data
Property Address Years
With
effect
from
Land
Area
(sq m)
Bldg
Gross
Floor
Area
(sq m)
Headquarters
Singapore Post Centre 10 Eunos Road 8 99 Aug 82 32,738 137,297
Post offices
Alexandra 110 Alexandra Road 99 Mar 92 2,305 802
Bukit Panjang 10 Choa Chu Kang Track 10 99 Mar 92 3,264 2,015
Killiney 1 Killiney Road 99 Mar 92 1,029 493
MacPherson 70 MacPherson Road 99 Mar 92 2,074 315
Pasir Panjang 396 Pasir Panjang Road 99 Mar 92 1,726 391
Serangoon Garden 54 Serangoon Garden Way 99 Mar 92 1,215 307
Serangoon Road 755 Upper Serangoon Road 99 Mar 92 1,353 3,012
Simpang Bedok 350 Bedok Road 99 Mar 92 1,134 329
Tanglin 56 Tanglin Road 99 Mar 92 2,622 2,678
Thomson Road 246T Upper Thomson Road 99 Mar 92 2,753 1,793
Others
Airmail Transit Centre 21 North Perimeter Road 30 Sep 00 2,903 8,862
Ayer Rajah Delivery Base 6 Ayer Rajah Crescent 30 Feb 96 4,401 10,274
Jurong Delivery Base 2 Kian Teck Way 30 Oct 95 4,016 3,574
Kallang Delivery Base 18 Jalan Lembah Kallang 30 Sep 98 2,761 6,850
Loyang Delivery Base 25 Loyang Lane 30 Oct 95 3,519 3,225
Woodlands Delivery Base 9 Woodlands Walk 30 Oct 95 3,040 2,393
Sustainability amid uncertainty. In a time and age when melamine is
appearing in milk and financial institutions are imploding, it is a tough call
to think of entities worth entrusting our assets to today. However, SingPost
is likely to appear on the list of trusted names given its consistent service
quality over the years in terms of speed and reliability. It also has a history
of paying out about 75-85% of its earnings and 70-80% of its free cash flow
every year in the form of dividends since 2004, after its IPO in 2003. This is
ideal as we prefer companies with free cash flow payout ratios below 80%,
demonstrating that the firm has catered a cash cushion to maintain its
dividend payments. SingPost has a dividend policy of minimum S$0.05 per
share.
Page 7 2 January 2009
Singapore Post Ltd
III. Risks
Spectacular capital gains unlikely. SingPost may not be attractive to
investors who are looking for spectacular capital gains, given its defensive
profile. As it has outperformed the market in the past year, its share price
has not plunged as much as others, so investors looking for quick gains
are unlikely to be satisfied with SingPost (unless SingPost gives a special
dividend when it sells its SPC building when the property market picks up).
Although management is looking at growth drivers across all its business
segments, it has singled out direct mail as an area they wish to further
develop. It is unlikely, however, that the direct mail market will grow
substantially in the short term given the current economic downturn as
companies may choose to curtail advertising costs. However SingPost
may be able to capture greater market share despite the slower market
growth in the short term.
Margins may deteriorate. With new entrants after the liberalisation of
the basic mail services market, we expect greater margin pressure. Profit
margin for 2Q09 was 31.0%, lower than 33.2% in 2Q08. As such,
management will continue to focus on cost management measures to
control its costs but we do note that easing inflation should help SingPost
mitigate its costs.
Exhibit 4: Margins
* Note: Lower PBT margin in 4Q08 partly due to S$4.9m impairment assessment for buildings
Source: Company data
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
EBITDA margin PBT margin PAT margin
Page 8 2 January 2009
Singapore Post Ltd
Increase in terminal dues. The Universal Postal Union (UPU) has
reclassified Singapore as a "target country" (previously known as
"industrialized country") from its current category of "net contributor country"
for the purpose of terminal dues1
1
settlement, with effect from 1 Jan 10.
Singapore will have to apply the relevant terminal dues system from 2010
to 2013 and contribute to the UPU Quality of Service Fund. All this means
that net terminal dues payments (dependent on type and volume of mail,
and destination mix) will rise, therefore increasing SingPost's traffic
expenses. SingPost said it will apply to IDA for adjustments in postage
rates if necessary, but any revisions will require IDA's approval.
Other risks. Terrorist acts happen swiftly and unexpectedly, and such
threats should never be disregarded. Postal and express delivery operations
may be disrupted by the threat of anthrax attacks or mail bombs, whether
real or hoaxes, including other terrorism-related activities. Any such incident
could negatively impact SingPost's business and reputation.
1 Terminal dues refer to settlements for the processing and delivery of international mailbetween countries.
Page 9 2 January 2009
Singapore Post Ltd
Section B: Country Analysis and Macroeconomic Forces
Economic downturn will affect demand. Singapore, being the first Asian
country to enter into a technical recession, is expected to contract by as
much as 2% in the coming year, according to official estimates. The
Economist Intelligence Unit forecasts that Singapore will be among the
world's 10 slowest-growing economies in 2009, and sees it contracting by
2.2%. With such a backdrop, SingPost's businesses, especially the mail
and retail segments, are likely to be affected as well:
1) Public mail has been decreasingly steadily over the years with e-
substitution (Exhibit 5), while business mail volumes should decline
with slower business activity. Direct mail may be impacted by lower
advertising expenditure, but SingPost hopes to mitigate its slowdown
by capturing greater market share, as discussed earlier.
2) SingPost's retail segment comprises agency services and retail
products, as well as financial services such as remittances and
unsecured lending. With a weakening real economy, people are likely
to curtail their spending and decrease consumption.
Exhibit 5: Decreasing public mail volumes
* Stamped and franked
Source: Company data
0
200
400
600
800
1000
FY04 FY05 FY06 FY07 FY08
million items
Public* Bulk Total
Page 10 2 January 2009
Singapore Post Ltd
Not all segments will be hit. Singapore's increasing foreign population
means that foreign remittances could grow, although money remitted home
could either rise (family members may need more money with the global
downturn) or fall (workers may be retrenched or suffer from pay-cuts).
SingPost revealed that its main customers are from the Philippines and
neighbouring countries, while Chinese and Indians form a smaller
percentage. Going forward, SingPost hopes to secure more customers in
the latter group to sustain the remittance business. SingPost also has six
pawnshops under the SpeedCash brand. Pawnshops are normally a reliable
bellweather of the state of the economy, as there is usually an increase in
business with more people looking for fast ways to get cash during an
economic crisis. With the economic downturn and projected rising
unemployment, pawnshops are likely to benefit.
Easing inflation may mitigate cost pressures. SingPost has been
experiencing cost pressures partly from rising labour costs which make up
the bulk (27%) of total operating expenses in FY08. It is unlikely that wage
and other costs increases will be substantial going forward given easing
inflation in Singapore and the current difficult operating environment which
has prompted firms to retrench workers. Fuel costs are also unlikely to
spike up in the near future (barring unforeseen circumstances) with lower
oil prices in light of the slowing global economy.
Exhibit 6: Inflation and labour & related expenses
Source: Company data, Bloomberg
26
28
30
32
34
36
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08
CY
S$m
il
0
1
2
3
4
5
6
7
8
%
Labour and related expenses SG CPI (RHS)
Page 11 2 January 2009
Singapore Post Ltd
Section C: Industry Analysis
As revenue from the mail business made up 77% of total revenue and 81%
of operating profit in FY08, we will examine this segment in greater detail.
I. Singapore's postal services sector
Slow growth in total mail volume. According to IDA, while total mail2
volume in Singapore enjoyed healthy growth in the 1990s, the average
growth rate in recent years has slowed to about 2% a year. Despite e-
substitution, SingPost experienced an increase in mail volume handled in
both domestic and international mail. In the longer term, once the economy
picks up, direct mail should be an important growth driver since there is
still room for SingPost's business to grow. However, as we weather the
current economic downturn, companies are expected to send out less
direct marketing mail. As such, mail industry growth is not expected to be
spectacular.
2 Includes domestic letters, postcards, and printed pages sent and received within
Singapore, and similar categories of international mail, both inbound and outbound.Excludes express letters and parcels.
Exhibit 7: Domestic and international mail volume handled (SingPost)
* (FY07/08 is for the period of Apr 07 to Mar 08)
Source: IDA
Page 12 2 January 2009
Singapore Post Ltd
Longest history in Singapore among the five existing firms. Although
SingPost was incorporated in Mar 92, its actual history actually dates back
to 1819 through its predecessors. Pursuant to a license granted by the IDA
in Apr 92, SingPost was the exclusive provider of basic mail services until
Mar 07. Swiss Post International Singapore was issued a postal service
license only in 2007. The others were issued licenses only in 2008.
Exhibit 8: Postal service operators in Singapore
Source: Company websites, IDA
Postal Service
OperatorPrincipal activities
Date of
issuanceRemarks
Spore Post Ltd
Provides domestic and international
postal services, and logistics services in
the domestic market with global offerings
Has a retail segment which includes
agency and financial services
1 Apr 92
Singapore's
designated public
postal licensee
Fuji Xerox
Spore Pte Ltd
Produces and processes documents,
provides document and knowledge
management solutions for businesses
and products include advanced colour
printers
18 Apr 08
Origin dates back to
1965 when company
was part of Rank
Xerox organisation
G3 Worldwide
Mail (Spore)
Pte Ltd
Provides international cross-border mail
services18 Feb 08
Joint venture between
SingPost, Royal Mail
and TNT Post (Spring
Global Mail)
Swiss Post Int'l
Spore Pte Ltd
Provides direct marketing, publication
distribution,
B2C dispatch of small items and
business mail services
1 Dec 07
Swiss Post
International takes
over SPI Mail
International Pte Ltd
WMG Pte Ltd
Provides direct marketing, publication
distribution, as well as print and
production services
24 Mar 08
Established in 1982
and aims to be a
leader in providing
fully integrated
marketing solutions in
Asia-Pacific
Basic mail is the only area of liberalisation. Basic mail refers to letters
and postcards, excluding express letters. Under the domestic mail segment,
SingPost is likely to encounter increased competition in the direct mail
business, although this segment has always been open to competition.
Among the other four postal service operators, it is possible that Swiss
Post International (S) and WMG may compete for market share in direct
marketing services. International mail (both inbound and outbound) is also
likely to face greater competition, as IDA's intention is to develop Singapore
as a regional printing hub and enhance e-commerce activities.
Page 13 2 January 2009
Singapore Post Ltd
Still has some exclusive rights. SingPost is the designated Public Postal
Licensee for Singapore, which means only it has access to letterbox
masterdoor keys, and the rationale behind IDA's decision is to protect mail
integrity in the public postal system and safeguard consumers' interests.
As such, new entrants to the industry either have to utilize SingPost's
network or deliver mail door-to-door, limiting pricing flexibility. SingPost will
also be the only one to issue national stamps and continue to be the
organization representing Singapore at international and regional postal
meetings.
Widening network. SingPost has also been increasing its reach to
consumers over the years. Its postal network (Exhibit 10) comprises post
offices, stamp vendors, SAMs and postboxes. Given the nature of the
business where convenience and easy access are among the main priorities
of the customer, SingPost's vast distribution network ensures that it has
the competitive advantage.
Exhibit 9: Original regulatory framework
Source: Company
SingPost's
services
Non-regulated
Domestic letters &
postcards
International letters &
postcards
Unaddressed ad mail
Mailing list etc
Printed papers
Small packets
Regulated
Logistics
Speedpost Islandwide,
Worldwide,freight
Warehousing, fulfilment and
distribution
Retail
Agency services
Financial services
SAMs
vPOST
Page 14 2 January 2009
Singapore Post Ltd
Degree of competition. Potential competitors are unlikely to compete
aggressively in the domestic mail market considering that they have to
utilize SingPost's access network since they do not hold the masterdoor
keys. As such, there is limited pricing flexibility. There could be more
competition in the international mail market but SingPost also has a joint
venture (Spring, set up in 2001) with TNT Post and Royal Mail for the cross-
border mail business. As for logistics, SingPost has admitted that this is a
highly competitive business but the group said it has performed well in the
past year by expanding its customer base in a variety of industries.
II. Global postal services sector
Postal service operators not spared. The financial crisis has affected
postal service operators around the world, including the United States Postal
Service (USPS), the biggest postal service in the world. The group posted
a net loss of US$2.8b for FY08, partly due to a 9.5b decline in mail volumes
to 202.7b pieces. The UK's Royal Mail has also said that its operations
"face additional risk from the squeeze in the UK economy" and from
businesses' and individuals' cost-cutting measures.
State of the worldwide postal sector. The postal sector is still very much
relevant and certain sectors are expected to grow. According to the UPU,
while growth in urgent mail is stagnating in industrialized countries, there
is still "tremendous growth potential" in emerging countries. Direct mail is
growing in both developed and developing countries. New technologies can
be utilized as means of increasing the interconnectedness among countries
and further integrating the postal offices around the world, therefore increasing
the points of access for ordinary citizens.
Exhibit 10: SingPost's postal network
Source: Company data
0
500
1000
1500
2000
2500
Jun
06
Sep
06
Dec
06
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Postbox es Stamp v endors SAMs
Smaller branches Main branches
Page 15 2 January 2009
Singapore Post Ltd
Exhibit 11: Access to postal services
*Note: Estimates by region in 2006
- 81% of world population benefits from home mail deliveries
- 3% lack postal services
- Mail deliveries to post office boxes are mainly made in Africa and Arab countries
Source: UPU (Berne, Nov 07)
Exhibit 12: Worldwide postal revenue
* Note: World estimates in 2006
- Global revenue: 204.8b SDR3
o Rose by 13% between '05 and '06
o Growth in 76.4% of the countries in the world
Source: UPU (Berne, Nov 07)
Postal parcels
and logistics
serv ices
27%
Postal financial
serv ices
14%
Other products
7%Letter post
52%
3 SDR refer to special drawing rights, the basis for the international fees of the UPU. Thevalue of one SDR in terms of USD is determined daily by the IMF, based on marketexchange rates of a basket of major currencies.
Page 16 2 January 2009
Singapore Post Ltd
Section D: Company Analysis
I. Business overview
SingPost has three main operating divisions: mail, logistics and retail. In
the latest 2Q09 results, mail accounted for 72% of total revenue, while
logistics and retail made up 15% and 13% respectively.
Exhibit 13: Revenue breakdown
Source: Company data
0
100
200
300
400
FY06 FY07 FY08
S$m
il
Mail Logistics Retail
Exhibit 14: FY08 operating profit breakdown
Source: Company data
80.7%
Retail
5.8%
Logistics
6.0%
Others
7.5%
Page 17 2 January 2009
Singapore Post Ltd
Public Mail
Public mail consists primarily of stamped mail and franked mail. Stamped
mail is sent mainly by individuals and consists letters and postcards
(excluding express letters). Volumes have been declining due to substitution
by email and the Internet. Franked mail is used primarily by home offices
and SMEs as a method of mailing large quantities of mail of different weights
and sizes. Volumes have been declining as franked mail customers upgrade
to bulk mail.
Bulk Mail
Bulk mail consists of publications, direct mail, and government and business
mail. It is used as an efficient means of distributing large quantities of
homogenous mail such as invoices and promotional mailings. Processing
and delivery times are reduced as the customer's items and postage rates
do not have to be weighed and calculated individually.
Hybrid Mail
More bulk mail is being outsourced for printing and mailing as companies
focus more on their core businesses and competencies. Main customers
include financial institutions, telecommunications companies, and
government bodies, among others.
International Mail
There is increasing competition in the international mail market as new
competitors enter previously regulated markets in the world. International
mail volumes are also likely to be hit by the global economic slowdown.
Exhibit 15: Business areas
Source: Company data
SingPost
Logistics Retail Others
Domestic
- Public mail- Publications- Direct mail- Govt & Business mail
- Others
International
- Incoming - Outgoing
Hybrid
(DataPost)
Speedpost
Warehousing,
fulfilment &
distribution
vPost
(Shop & Ship)
Agency
services
Financial
services
vPost
(Bill presentment /payment)
Property
Page 18 2 January 2009
Singapore Post Ltd
Philatelic
SingPost produces commemorative and special stamps as well as other
collectibles for tourists and the gift market.
Speedpost
Speedpost is a door-to-door express delivery service for documents, parcels
and freight. Speedpost Islandwide is a service within Singapore, Speedpost
Worldwide provides international deliveries, while Speedpost Freight
transports large or heavyweight shipments.
Warehousing, fulfillment and distribution
This is a complement to Speedpost and provides business customers a
one-stop logistics service. Fulfillment services include item collection,
wrapping, payment collection, shipping and invoicing.
vPost (shop and ship)
vPost is SingPost's online portal that offers a range of services including
shopping and shipping. Currently, customers can purchase items from
certain countries in the world and have them delivered to their doorstep.
Retail
SingPost sells a wide variety of postal and non-postal products including
packaging and stationery items. Customers can also pay their utility bills,
taxes, fines, license fees and other contributions as organizations outsource
payment administration to SingPost.
Under financial services, remittances and unsecured lending made up the
bulk of this segment's revenue while post-assurance and secured lending
accounted for the rest. With the credit crunch and economic downturn,
SingPost's lending business may improve as banks tighten their lending.
II. Competitive positioning and corporate strategies
Emphasis on quality. Instead of merely relying on a cost leadership model,
SingPost places great emphasis on service quality and worker productivity.
In FY08, SingPost continued to surpass the Quality of Serivce in mail delivery
set by the IDA by achieving more than 99% delivery by the next working
day for mail posted within and outside the Central Business District (CBD).
The group also achieved international recognition in the World Mail Awards
(Quality category) on the basis of increased productivity, discounts to
customers, lower incidence of damage and improved sorting accuracy and
delivery.
Productivity increases. Postman productivity has also increased from
2,923 to 3,130 items delivered per postman per effective man-day in FY08,
while productivity of mail processing officers grew from 5,765 to 6,307 items
sorted per processing officer (Exhibit 16). Going forward, SingPost aims to
pursue further efficiency improvements.
Page 19 2 January 2009
Singapore Post Ltd
More effective direct mail. SingPost also has a competitive advantage
based on its extensive network and proprietary database. SingPost's
updated data repository and clear understanding of the whereabouts of the
target audience is important in increasing the effectiveness of direct mail,
as mail can be sent to targeted customer segments. This increases the
response rate and cuts unnecessary spending for the corporate partner.
One-Stop-Shop service. SingPost is able to provide a one-stop service
for its customers through its mail, logistics and retail divisions. The group
has diversified its operations in the past few years with forays into
remittances and lending services, among others. New initiatives and joint
ventures have been undertaken as well, and the following exhibit illustrates
some in the past three years.
Exhibit 16: Productivity
Source: Company data
0
1000
2000
3000
4000
5000
6000
7000
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
mail items processed per processing off icer per effect ive man-day
mail items delivered per postman per effect ive man-day
Page 20 2 January 2009
Singapore Post Ltd
III. SWOT analysis table
The strengths, weaknesses, opportunities and threats with regards to
SingPost have been discussed in earlier parts of the report, but just to
recap:
Exhibit 17: Key JVs and initiatives in the past three years
Date Action Description
15 Dec 08 Launched A.M. MailTime-certain service that delivers mail by
11am the next working day
20 Oct 08 Termination of JVJV with GPN International and Oce (refer to
3 May 07 below)
19 Sep 08Added new remittance
channel
New channel to the Philippines through the
Philppine National Bank
29 Apr 08Collaboration with ABN
AMRO
SingPost will distribute ABN AMRO's line of
credit, PostLine
28 Mar 08Launched Asian property
sercurities fund
Collaboration with Prudential Asset
Management
5 Feb 08Offered the SingPost Visa
Money Transfer service
First postal service provider in the world to
offer Visa remittance service
22 Jan 08New remittance service to
Indonesia
Collarboration with PT Bank Negara
23 Jul 08 Launched Dmrocket one-stop specialist Direct Mail service
2 Jul 07JV with Thai British
Security Printing
Set up JVC to provide laser printing and
enveloping statements, bills etc
4 May 07Cooperation agreement
with Hongkong Post
Provide data printing, enveloping and other
services
3 May 07JV with GPN International
and Oce
To engage in the business of Print-On-
Demand
23 Nov 06Collaboration with Pos
Indonesia
Four initiatives on channelling services,
remittances, logistics and direct mail
14 Nov 06Established unit trusts
distribution partnership
Collaboration with Prudential Asset
Management
29 Sep 06 Launched PostREALTYCollaboration with ERA Realty Network of
Hersing Corporation
23 Jan 06Launched Speedpost
Express
Premium express courier service with DHL
as a partner
Source: Company data
Page 21 2 January 2009
Singapore Post Ltd
Exhibit 18: SWOT table
Source: OIR
Strengths Weaknesses
A. Dominant position in postal services industry
B. Stable operating and free cash flows
C. Able to leverage on wide distribution network
A. Slow growth in mail volume, the mainstay business
B. Limited upside for postage rates which is also
subject to IDA's approval
Opportunities Threats
A. New initiatives and diversification of services to
present more opportunities
B. Potential boosts from assets
C. Direct mail a market worth focusing but may be
affected in this downturn
A. Pricing pressures from increasing competition
B. Higher expenses from terminal dues revision
C. Economic downturn to affect demand
Page 22 2 January 2009
Singapore Post Ltd
Section E: Financial Analysis
I. Financial performance and forecasts
Good 2Q09 results. In SingPost's latest 2Q09 results, group revenue grew
by 4.1% YoY to S$120.7m with improved performances in all three business
segments. Mail revenue rose 2.8% on the back of higher contributions from
domestic, international and hybrid mail, as well as the philatelic business.
Logistics revenue increased by 6.4% due to growth in Speedpost, vPost
shipping transactions as well as warehousing, fulfillment and distribution.
As for retail, revenue rose by 8.6%, driven by financial and agency services.
The group's rental and property-related income grew by 39.3% to S$8.2m,
boosted by higher rental income from its headquarters, the SPC.
Forecasts. We are estimating a 2.5% growth in revenue in FY09, followed
by a 2.0% contraction in FY10. To recap, SingPost's revenue was flat in
the Asian Financial Crisis (1997/1998) but fell by 2% during the SARS
period (2003). As the property and rental market weakens, we are unlikely
to see a similar increase in SingPost's rental and property-related income
as compared to FY08. The leases in the SPC are staggered, and about
one-third of them come up for renewal every year. A check with SingPost
also confirmed that lease rates are softening. Margins are prone to downward
pressures with new entrants in the industry but management said it will
continue to focus on cost management measures. Easing inflation is likely
to help SingPost in this area as well.
Bonds are the only borrowings. SingPost's only borrowings is its
unsecured bonds of principal amount S$300m listed on the SGX-ST. The
maturity period is 10 years from 11 Apr 03 with fixed interest rate of 3.13%
per annum. This translates to a debt-to-equity ratio of 1.3 as of Sep 08.
There is solid cash flow protection due to its strong operating cash flows
(operating CF: S$173.7m, FCF: S$160.9m in FY08). Interest coverage using
EBIT/Interest gives a ratio of 16.1.
II. Valuation and recommendation
Upside potential with low refinancing risk. In view of its stable cash
flows, we value the group on a discounted free cash flow to equity basis
(8.8% cost of equity, 2% terminal growth), deriving a fair value estimate of
S$0.93. We have adopted a beta of 0.8 instead of Bloomberg's 0.6 for a
more conservative cost of equity. As our sensitivity analysis shows, even
with a higher cost of equity at 9.0% or lower terminal growth of 1.5%,
SingPost still has an upside potential sufficient for a BUY call. SingPost
has little capital expenditure (less than 5% of revenue every year, and has
been 2-3% historically) and its defensive business and strong cash flows
means it has little refinancing risk.
Page 23 2 January 2009
Singapore Post Ltd
Exhibit 19: DCF sensitivity analysis
Source: OIR estimates
cost of equity
8.6% 8.8% 9.0% 9.2%
terminal
growth 0.0% 0.80 0.78 0.76 0.74
0.5% 0.83 0.81 0.79 0.77
1.0% 0.87 0.85 0.83 0.81
1.5% 0.92 0.89 0.87 0.84
2.0% 0.97 0.93 0.91 0.88
2.5% 1.03 0.99 0.96 0.93
3.0% 1.10 1.06 1.02 0.99
Exhibit 20: Peer comparison
Source: Bloomberg, OIR
CompanyMarket
CapP/B
Div
Yield
Cur Yr (x) Next Yr (x) (x) (%)
Mail and Logistics companies
Deutsche Post Euro 0.12 14.4 19.7 10.7 1.3 7.6
Pos Malaysia MYR 2.02 1.1 11.6 11.1 1.2 2.5
Fedex USD 0.62 19.4 14.7 13.7 1.3 0.7
UPS USD 0.54 53.9 15.3 15.5 4.9 3.3
Average 15.3 12.8 2.2 3.5
Domestic high yields
Comfort Delgro SGD 1.45 3.0 16.1 13.8 2.0 3.6
SMRT SGD 1.65 2.5 15.4 14.3 3.7 4.7
SPH SGD 3.11 5.0 10.6 10.9 2.4 5.5
Starhub SGD 1.94 3.3 10.8 10.2 32.3 9.3
M1 SGD 1.48 1.3 8.7 8.8 7.1 9.8
Average 12.3 11.6 9.5 6.6
Average (both groups) 13.7 12.1 6.2 5.2
SingPost SGD 0.80 1.5 10.3 10.6 6.7 7.9
Price P/E
(Local currency $)
Page 24 2 January 2009
Singapore Post Ltd
Initiate with BUY. We initiate coverage on SingPost with a BUY
recommendation with a fair value estimate of S$0.93. We like SingPost for
its stable operating cash flows and dividend yield, and we think its defensive
profile will serve it well during this period of economic uncertainty. Although
mail volume growth may be crimped with a slowing economy and e-
substitution, SingPost has launched new initiatives over the years and
diversified into other business areas to pursue growth. SingPost is also
asset rich, and there is always the possibility of unlocking asset values
though this may be unlikely in the near future with a weakening property
market. SingPost has a dividend policy of minimum S$0.05 per share a
year, implying at least a 6.3% yield. Assuming SingPost continues its
S$0.0625 dividend per share in FY09, this would imply a 7.9% yield, which
is attractive given its defensiveness.
Page 25 2 January 2009
Singapore Post Ltd
Singapore Post Ltd's Key Financial Data
Spore Post Results 2Q08 2Q09 % Chg 1Q09 % Chg
Year Ended 31 Mar (S$m) (S$m) (S$m) (YoY) (S$m) (QoQ)
Revenue 116.0 120.7 4.1% 120.9 -0.1%
EBITDA 43.6 43.8 0.4% 47.2 -7.1%
Depreciation & amortisation -6.5 -6.5 -0.4% -6.6 -0.8%
Net interest expense -2.0 -1.7 -15.5% -1.7 2.0%
Associates 1.1 3.0 161.3% 1.0 183.2%
Others 11.5 7.3 -36.3% 8.4 -12.3%
Pre-tax profit 47.7 45.9 -3.8% 48.3 -5.0%
Tax -7.9 -8.4 5.6% -8.6 -2.6%
Minority interests -0.1 -0.1 -20.6% -0.3 -60.6%
Net profit 39.7 37.4 -5.6% 39.5 -5.1%
INCOME STATEMENT
Year Ended 31 Mar (S$m) FY07 FY08 FY09F FY010F
Revenue 436.0 472.6 484.3 474.7
Operating expenses -267.9 -298.3 -314.3 -316.1
EBITDA 168.2 174.3 170.0 158.5
Depreciation & amortisation -25.6 -26.4 -26.0 -25.2
EBIT 142.6 148.0 144.0 133.3
Net interest expense -9.5 -8.1 -7.3 -6.8
Associates 6.6 8.2 8.2 8.2
Others 26.8 27.5 33.2 35.2
Pre-tax profit 166.4 175.5 178.1 170.0
Tax -26.2 -25.8 -24.9 -23.8
Minority interests -0.5 -0.5 -0.5 -0.5
Net profit 139.8 149.3 152.7 145.7
Earnings per share (cents) 7.3 7.8 7.9 7.6
Fully diluted earnings per share (cents) 7.3 7.8 7.9 7.6
Page 26 2 January 2009
Singapore Post Ltd
BALANCE SHEET
As at 31 Mar (S$m) FY07 FY08 FY09F FY010F
Cash 69.0 104.1 149.2 185.4
Other current assets 69.8 77.8 81.6 81.4
Fixed assets 492.2 470.8 449.8 428.8
Other long term assets 88.3 94.7 94.6 94.5
Total assets 719.3 747.4 775.1 790.1
Current liabilities less debt 192.0 201.9 207.6 204.2
Debt 316.3 302.1 293.0 287.2
Other long term liabilities 21.8 17.8 16.1 14.5
Total liabilities 530.2 521.8 516.7 505.9
Shareholders equity 185.4 221.4 253.7 279.0
Minority interests 3.7 4.2 4.7 5.2
Total equity and liabilities 719.3 747.4 775.1 790.1
NTA per share (cents) 9.7 11.6 13.3 14.6
CASH FLOW
Year Ended 31 Mar (S$m) FY07 FY08 FY09F FY010F
Operating profit before working cap. changes 190.5 200.5 204.1 194.6
Working capital changes -2.4 4.3 1.2 -3.3
Income tax -27.3 -31.1 -23.9 -23.8
Net cash from operations 160.8 173.7 181.4 167.5
Capex -8.5 -12.8 -13.0 -12.3
Other investing flows 15.3 18.1 14.9 15.9
Investing cash flow 6.8 5.3 1.9 3.6
Change in equity 4.0 5.0 0.0 0.0
Net change in debt -40.0 -20.0 -9.1 -5.9
Dividends paid -105.3 -120.1 -120.4 -120.4
Others -10.6 -8.7 -8.8 -8.6
Financing cash flow -152.0 -143.8 -138.2 -134.9
Other adjustments 0.0 0.0 0.0 0.0
Net cash flow 15.7 35.2 45.1 36.3
Cash at beginning of year 53.3 69.0 104.1 149.2
Cash at end of year 69.0 104.1 149.2 185.5
KEY RATIOS
PER (x) 10.9 10.2 10.0 10.5
Price/NTA (x) 8.2 6.9 6.0 5.4
EV/EBITDA (x) 10.5 9.9 9.9 10.3
Dividend yield (%) 6.9 7.9 7.9 7.9
ROIC (%) 19.5 20.1 19.8 18.6
ROE (%) 75.4 67.4 60.2 52.2
Debt/Equity (%) 170.6 136.4 115.5 102.9
PE to growth (x) 0.8 1.6 4.8 -2.3
Source: Company data, OIR estimates
Page 27 2 January 2009
Singapore Post Ltd
For OCBC Investment Research Pte Ltd
Carmen LeeHead of ResearchPublished by OCBC Investment Research Pte Ltd
SHAREHOLDING DECLARATION:The analyst/analysts who wrote this report holds NIL shares in the above security.
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