BUY S$1.01 STI : 2,603.12
(Upgrade from HOLD)
Price Target : 12-month S$ 1.17
Reason for Report : Change in recommendation
Potential Catalyst: Share buybacks
DBSV vs Consensus: Broadly inline
• Generates S$50m cash annually after paying dividends; deployed in six M&A transactions YTD
• Singpost still needs to deploy idle cash, so share buybacks are likely to continue
• Upgrade to BUY with unchanged TP of S$1.17. We see a favorable +23% reward versus –4% risk
Singpost is a cash machine; deployment of cash is key. Free cash flow usually exceeds earnings, as regular capex of S$10-15m is less than depreciation expenses of S$20-25m. Singpost pays 6.25 Scts DPS each year, which translates to S$120m in dividends versus free cash flow of ~S$170m.
Six M&A transactions done in the last six months. SingPost has used S$65m to acquire stakes in six regional companies in the logistics, e-commerce and e-substitution sectors. Contribution from these acquisitions is estimated to be minimal in FY12F as Singpost invests in people and resources to manage these businesses. However from next year onwards, these investments will start to pay off.
Share buybacks may continue to deploy idle cash. Singpost pays fixed rate of 3.5% on its 10- year bonds while it stands to gain over 6% yield by buying back its own shares. Treasury shares can also be used later for regional expansion.
Trading at 13% discount to its average 1-year forward PE of 13.8x. Singpost has been resilient to market volatility, falling 10% vs. 20% decline in broader STI over the last two months. We upgrade stock to BUY at our TP of S$1.17 based on DDM (cost of equity 7.7%, growth rate 2%) for its >6% yield and steady earnings growth through acquisitions. We assume that dividends can grow by 2% p.a. in the long term.
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