Singapore Post

DBS Vickers Research, Sept 3

SINGPOST received approval for 12-30 per cent rate hike across domestic and international mail from Oct 1, 2014 - the first hike in eight years to mitigate cost increase.

Annual revenue set to improve S$12 million to S$16 million but most of it will flow to the bottom line; our FY15/16 forecast EPS is raised 3 per cent/5 per cent conservatively.

Maintain "buy" with revised DCF (discounted cash flow) based (weighted average cost of capital 6.3 per cent, terminal rate 2 per cent) TP of S$2.12. Offers potential return of 25 per cent.

Rate hike in response to declining domestic mail volume and rising costs. Since 2008, according to SingPost, labour and fuel costs have gone up ~30 per cent each, inflation has risen 26 per cent while terminal dues for international mail have risen 43 per cent and will further rise 37 per cent by 2017. About 60 per cent of the domestic mail and ~30 per cent of international outgoing mail is still regulated across which SingPost has raised postal rates by 12-30 per cent, in our estimates.

The hike will be effective from Oct 1, 2014, and SingPost will absorb the cost increase for SMEs in the first year.

Based on last year's volume, SingPost believes that annual revenue impact could be ~S$16 million; however, the actual impact may be ~S$12 million due to rebates to SMEs in the first year.

Given that the mail segment is a high-margin business, this should translate into 3 per cent/5 per cent higher FY15/16 forecast EPS conservatively.

SingPost should command premium valuation for three reasons. Assuming it makes S$300 million worth of acquisitions at 12-15x PE, it may add S$20-25 million or 15-20 per cent to our FY16 forecast earnings. Secondly, SPOST is incurring ~S$15 million developmental expenses each year, mainly in hiring and training people which could continue for 2-3 more years.

We expect SingPost to register healthy growth beyond that.

Lastly, higher e-commerce volumes could surprise in FY16 forecast as we have assumed only ~S$50 million worth of business from its Chinese e-commerce partner in our forecasts.

BUY