Singapore Post: Results in line; awaiting more news (OCBC)

1QFY12 results within expectations. Singapore Post (SingPost) reported a 3.0% YoY rise in revenue to S$142.3m but saw a 3.5% fall in net profit to S$39.2m in 1QFY12, accounting for 24.9% and 23.0% of our full year estimates, respectively. Mail revenue grew 1.6% YoY with improved contributions from domestic mail, driven by direct mail. Logistics revenue increased by 10.7% with growth in Quantium Solutions, Speedpost and vPost shipping activities. Retail revenue grew by 1.5% in the last quarter, while rental and property-related income was also higher by 5.1%, mainly due to higher rental income from the Singapore Post Centre.

Higher operating costs. Though top-line figures grew, operational costs continued to increase as well. Higher salaries and contract labour costs in the tight labour market led to a 12.2% YoY rise in labour and related expenses. Stripping away benefits worth about S$470k from the Jobs Credit Scheme in 1QFY11, labour and related expenses still grew by 10.9%. Administrative and other expenses also increased by 8.5% YoY, and we expect cost pressures to continue amid the inflationary environment.

Turnaround in associate losses soon. Share of loss of associated companies and JVs was S$0.3m in 1QFY12, and this was mainly attributable to Postea Inc. We understand that none of the companies that SingPost has acquired stakes in recent months (GDEX, Efficient, ITL and 4PX) have been included in last quarters' results, and we expect to see a profit in coming quarters as the four are all currently profitable.

Maintain HOLD. The group has been active in acquiring stakes in companies outside of Singapore for both business and geographical diversification. This momentum is likely to continue, and we expect to hear more news on the M&A front, especially in logistics and e-commerce. We have tweaked our estimates to take into account rising operational costs amidst the inflationary environment, as well as increasing contribution from the logistics business which generally has lower margins than the mail business. As such, our DCF-based fair value estimate slips from S$1.21 to S$1.14. Meanwhile, the group has declared an interim dividend of 1.25 S cents per share, in line with its usual practice. Maintain HOLD for SingPost's decent dividend yield of 5.7%, backed by its stable operating cash flows and strong financial position (net gearing stands at 0.5x and EBITDA/interest coverage of 18.1x as at 30 Jun 2011).