SingPost

OCBC on 28 Sept 2012

The steady climb of Singapore Post’s (SingPost) stock has continued since the start of the year when we upgraded the stock to BUY. Cautiously improving market sentiment and the flood of liquidity searching for safe havens with respectable yields has supported performance, along with greater expectations of further growth opportunities in SingPost after the issuance of perpetual capital securities in Feb. Though spectacular gains are unlikely to be enjoyed by investors in the stock, SingPost’s total return has been attractive since 2010 in an uncertain environment. The group has launched new initiatives over the years and diversified into other business areas, but the next leg of growth is heavily dependent on management’s astute use of the group’s cash pile. We update our valuation assumptions (lower cost of equity: 6.49%, terminal growth unchanged: 1.5%), and our DDM-derived fair value estimate rises from S$1.14 to S$1.20. Maintain BUY.

Continues its upward march
The steady climb of Singapore Post’s (SingPost) stock has continued since the start of the year when we upgraded the stock to BUY. Cautiously improving market sentiment and the flood of liquidity searching for safe havens with respectable yields has supported performance, along with greater expectations of further growth opportunities in SingPost after the issuance of S$350m perpetual capital securities in Feb this year.

Total returns since 2010 attractive for a “dividend” stock
As we noted in our initiation report in Jan 2009, spectacular gains are unlikely to be enjoyed by investors in the stock. This is evident by the STI’s significant outperformance against SingPost in 2009 when global equities rebounded from beaten-down valuations in Mar 2009. However, we note that SingPost’s performance in 2010, 2011 and 2012 YTD has been commendable – it outperformed the STI in 2010, slightly lagged the STI in 2011 and is now ahead of the market so far this year (Exhibit 1). This has allowed investors to ride on the upturn in the last few years while collecting dividends (Exhibit 2). Looking at 2012, this year is likely to be a good one for SingPost’s investors too. 

Upside still available; maintain BUY
We like SingPost for its stable operating cash flows and consistent dividends. At the same time, the group has launched new initiatives over the years and diversified into other business areas as well. However, the next leg of growth is heavily dependent on management’s astute use of the group’s cash pile (S$668.6m as of Jun 2012). With changing market dynamics (lower risk free rate and market return), we update our valuation assumptions (lower cost of equity: 6.49%, terminal growth unchanged: 1.5%). Based on our dividend discount model, our fair value estimate rises from S$1.14 to S$1.20. Maintain BUY.