Wednesday, 6 November 2013

Analysis of Singapore Post - Still delivering in rainy days?

We may not realize that Singapore Post may be the oldest brand formed in Singapore. It can be traced back to the time when Sir Raffles landed on the shore. The first general postal office was located where we know now as Fullerton Hotel. Imagine over a century ago in our island, even before the telegraph was invented and available to general public, many Singaporeans' ancestors coming from China, India, Europe and other places of the world wrote down their bitter or sweet stories and sent with their best wishes to their families thousand miles away. All these personal letters carrying different life stories, together with official, military and business documents were delivered by Singapore Postal System. Back then Postal Services, as the only way of communication, played a crucial role in the industrialized countries and their colonies. No wonder in many countries, Postal Services were run by government. Of course nowadays many counties' postal services had been privatized, with a notable exception of USPS, which is still a part of US government because it was written down in the US Constitution. It came as no surprise that USPS, under US government, has been losing money for many years and wasting lots of US tax payers' dollars. But they could not just simply close USPS as that would require an amendment to the Constitution, which is a frightfully lengthy process requiring not only approval by Congress and Senate, endorsement by President, but also rectification by over 2/3 or 37 states (37/50) within certain period, as interpreted by Federal Supreme Court. What an amazing system with check and balance of power! (I am not sarcastic here. Really!)

Anyway, in our digital age, many would consider postal service a sunset industry. Who would write and send letters today? Except bills, bank statements and ads, when was the last time you ever received a hand-written letter or postcard from families, friends or strangers? Some even say Emails are phasing out now, let alone the mails. But that impression does not reconcile with Singapore Post's financial reports because you would find out that Singapore Post's Mail segment business's profit margin is consistently around 30%. In comparison, SPH's (incl. Newspaper and property rents)? : 30%. Singtel's ( excl. Optus)? : 31%, and Singapore Airline's (excl.SIAEC)? : 2.8% ( Yes, 2 point 8)

Since FY06/07, Spost has been paying out dividend of 6.25 cents every year. No more, no less. In fact, if you subscribed to its IPO offer price(S$ 0.6) and hold until today(closing S$1.32 @ 06 Nov 2013), your capital gain would be 120%, and counting on the dividends over the years from 2002 to 2013? 234%! or ACGR of 8%!


Not too shabby. Right? Has anyone done that? Well, sadly not me. But I remember vividly back in Nanyang Business School, my professor, when using Spost as a study case, told us that " you know the Father, the Mother (May she rest in peace), the sons and the daughter-in-laws all subscribed like mad! "  Savvy?

Well, for income-focused investors, Singapore Post is attractive as it has the pros:
1.  Monopolized position in Singapore domestic Mail business. Although the business is small and has little room for growth, it has been reduced to stable and consistent level with 30% profit margin. Besides, it is a centuries old business, it's very hard for management to mess it up.
2. Stable dividend payout, like a bond, but only it is not threatened by future interest rise. Some one even call it a dividend heaven. Spost is in net cash position, like many other GLC corps, keeps a strong balance sheet.
3. It still has values to be unlocked, such as product inovation, e.g. they are setting up self-collection statstions for bulky items. (This was invented by Germans and proven to be popular. Btw, the current CEO is a German, and Deutsche Post system is one the very few post systems that are running efficiently with profits, others include Swiss Post and Singapore Post). Besides, it can increase productivity as the government promotes now, and it also has an valuable property in Paya Lebar. What to do with that? Consider setting up a REIT too? ( Sigh~ looks like eventually all left for Singapore economy is property, tour, and finance, just like Hong Kong or Monaco. But never like Swiss as it aspires to become to! Or maybe not. Let’s hope.)
Some cons are:
1.  Sunset mail industry.
2.  New segments in logistics facing competition and overseas purchase may experience learning curve.
3. As a result of above, stagnant Dividend or even dividend cut.
 
See the monthly chart. The strong rebound since 2009 has seen fatigue now. MACD indicates future price weakness. But upward trend line is still firm. Read the recent report from OCBC investment. Indeed, hold is the best strategy for now.
 
 
 Original Link:
http://www.ocbcresearch.com/Article.aspx?type=research&id=20130614092212_52125

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By Low Pei Han
Fri, 14 Jun 2013, 09:27:31 SGT                                   


Since our last report on Singapore Post (SingPost) on 6 May 2013, its share price rose about 8.5% to reach S$1.40 in mid May, but fell by an even greater amount (~10%) subsequently to its current price, which is a level that is supported by fundamentals. With increasing labour-related expenses and administrative expenses, operating costs of the group have been steadily increasing. Along with the changing profile of mail, the group is diversifying its businesses. Even during the midst of its transformation, SingPost is a good stock to hold in the current volatile environment. However, we see limited upside potential unless earnings growth from its acquisitions proves to be better than expected. Maintain HOLD with S$1.23 fair value estimate.

Rise and fall of share price post results
Since our last report on Singapore Post (SingPost) on 6 May 2013, its share price rose about 8.5% to reach S$1.40 in mid May, but fell by an even greater amount (~10%) subsequently to its current price of S$1.25. As mentioned in our earlier report, we expect the stock to be supported by investors seeking yield, given the nature of SingPost’s businesses and consistency of its dividends. However, the strength of its rally (boosted by heightened interest in dividend-yielding instruments such as REITs) took us by surprise, and the subsequent profit-taking by investors has brought the share price down to a range that is supported by fundamentals.

In the midst of transformation
With increasing labour-related expenses and administrative expenses, operating costs of the group have been steadily increasing. The changing profile of mail (domestic mail expected to trend lower though number of households in Singapore trends higher) has also meant a rapid growth of packages and decline in letters, leading to more investment requirements by management in its infrastructure. The group is in the midst of transformation to diversify its businesses, having embarked on quite a number, albeit relatively small, acquisitions so far. More recently, the group announced that it has completed its acquisition of 30% interest in Dash Logistics Company.

Maintain HOLD
SingPost is a good stock to hold in the current volatile environment, as its consistent dividends are backed by stable operating cash flows. We look forward to the group’s transformation as it seeks more growth opportunities, but till then, we see limited upside potential unless earnings growth from its acquisitions proves to be better than expected. Still, we expect the share price to be supported by investors seeking yield (~5% FY13F). Maintain HOLD with S$1.23 fair value estimate.

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3 comments:

  1. No matter how unexciting its other non-mail business segments it must not sit idle and doing nothing. So, investors can continue to feel and rest assured that it still delivers "the mail no matter how bad is the weather". Very hard working bunch of people in SingPost

    ReplyDelete
  2. Most what i read online is trash and copy paste but i think you offer something different. Keep it like this.
    Job Opening Singapore

    ReplyDelete
    Replies
    1. Thanks for ur encouraging words. I have too many thoughts but too little time to write it down.

      Delete

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