Singpost-GS

What's changed
Amidst the current market uncertainty, we believe there is low risk to
SingPost’s attractive dividend and free cash flow story on account of its
stable margins and sustained low capex spending. We think SingPost is
likely to remain committed to its dividend policy of a minimum 5 cents per
share over the medium term; we forecast SingPost to pay 6.25 cents/share
(consistent with the last two years), representing 74%-79% of its simple
FCF (operating FCF plus rental income) in FY2009E-FY2010E. In addition,
we believe that the general decline in interest rates vis-à-vis the
sustainable yield of the stock could help rerate the stock.
Implications
We believe that SingPost’s revenue trend is likely to track the Singapore
broader economy; however, a key positive we note from the past few
results has been management’s rigorous focus on cash flow. We note that
SingPost’s EBITDA margin and capex-to-sales ratio have remained stable
at 37%-38% and 2%-3% respectively over the last three years. We expect
SingPost to continue generating steady cash flows and dividend streams,
offering a simple FCF and dividend yield of 11% and 8% in FY2009EFY2010E.
Another key positive for SingPost is its strong balance sheet; we
expect its net gearing ratio to fall to 0.5X-0.3X by FY2009E-FY2010E.
Valuation
We believe that SingPost is attractively priced relative to its local peers,
trading at a CY2009E PE and dividend yield of 10.2X and 7.9% vs. the
broader Singapore market’s 10X and 5.4%. We have lowered our FY2011E
forecasts by 12.5% due to lower revenue expectations. We maintain our
Buy rating and reduce our 12-month DCF-based price target by 11% to
S$1.07 from S$1.20 on the back of our lower earnings adjustment.
Key risks
Worse-than-expected macro slowdown; effects of postal liberalization,
which should remain muted over the near to medium term, in our view.