Singapore Post

Kim Eng on 13 Mar 2012

Potential for higher payout, reiterate Buy. SingPost’s recent issue of $350m in perpetual securities is superior to other issues as it commands the highest debt rating in the market and its 4.25% coupon rate is also the lowest. We see this as an opportune time to remind investors of the company’s financial strength and the fundamental stability of its core mail business. Reiterate Buy on SingPost for its very attractive dividend yield of 6.4%, which we believe is almost guaranteed, based on its history of very stable earnings, even before counting any potential upside from special dividends. Our target price is slightly reduced to $1.05 as we roll forward our valuation basis to FY Mar13F.

Not at shareholders’ expense. The $350m senior perpetual cumulative securities, or Perps, pay a 4.25% coupon, which is higher than SingPost’s overall cost of debt of 3.13-3.5%. With the Perps, the group’s interest expense is expected to double to $26m. Nonetheless, management’s dividend commitment of 6.25 cents per share is intact. In fact, there may be room for dividend upside as SingPost may not use up all the additional funds for acquisitions. And even as the company continues to face cost pressures, our earnings sensitive analysis shows that pre-tax income can withstand a decline of 20% before the payout ratio begins to look too generous on paper.

Time to flex financial muscle? To recap, SingPost has not even used up half the $200m it raised in March 2010 for acquisitions. The additional $350m raised will give the group substantial firepower to gun for bigger acquisitions, if not offer a higher dividend payout or even buy back its own shares that are giving a higher yield than its coupon rate.

Balancing optimal gearing ratio and ROE. Management is comfortable with a gearing level of up to 2x. With Perps being classified as equity, SingPost’s net gearing thus falls from 0.5x as of FY11 to $224m net cash including the Perps. This implies significant debt headroom not only for expansion, but also in support of our argument for higher dividend payouts to optimise its gearing ratio and ROE.

Dividend provides valuation support. We roll forward the basis of our target price to FY Mar13F, using a historical average PER of 14x to arrive at a target price of $1.05, slightly reduced from $1.09 previously. While SingPost continues to face cost pressure, its dividend payout should provide valuation support. Buy for a total return of 15%.