Singapore Post-090102-OIR

MITA No. 013/06/2008

Please refer to the important disclosures at the back of this document.

S I N G A P O R E Company Report

2 January 2009

Initiating Coverage

BUY

S$0.795

Fair Value: S$0.93

Stock Code:Reuters: SPOS.SIBloomberg: SPOST SPISIN Code S08

Event: Initiate Coverage

General Data

Issued Capital (m) 1,926

Mkt Cap (S$m/US$m) 1,531 / 1,064

Major Shareholder

SingTel (25.7%)

Free Float (%) 74.2

NTA per share (S$) 0.118

Daily Vol 3-mth (‘000) 4,079

52Wk High (S$) 1.180

52Wk Low (S$) 0.795

Singapore's established postal services operator. Singapore Post

(SingPost) is the designated Public Postal Licensee for Singapore. It

provides domestic and international postal services, and is also a logistics

provider in the domestic market with global service offerings to more than

220 territories/countries. Leveraging on its retail distribution network,

SingPost also provides agency and financial services. In 1H09, the group

achieved a 4.3% YoY rise in revenue to S$241.6m but incurred a 1.5% fall

in net profit to S$76.9m. Excluding one-off items, underlying net profit was

higher by 11.5% at S$77.7m.

Should remain dominant despite liberalisation. Despite the

liberalisation of the basic mail services market in Apr 07, SingPost is still

in a strong position to remain as the dominant postal services operator.

Only it can hold the masterdoor keys to letterboxes provided by property

owners and developers, including those in HDB estates, as dictated by

the Info-communications Development Authority (IDA). With other

advantages like an established distribution network, significant free cash

flow, a monopoly over stamp issues and an entrenched brand name, we

believe that the liberalisation should have limited impact on SingPost.

Defensiveness amid uncertainty. SingPost has stable operating and

free cash flows given the nature of its business. It has also been increasing

its dividend per share since its IPO in 2003 to S$0.0625 in FY08. With the

uncertainty in today's stock markets, its earnings are comparatively

defensive. Although mail volume growth may be affected by e-substitution

and the slowing economy, SingPost has undertaken proactive measures,

as evidenced from its launched initiatives and diversification of services.

Initiate with BUY. The defensive nature of SingPost's business and its

dominant market position renders it an attractive investment. Its proactive

measures demonstrate its resolution to safeguard its profits, making it an

even more compelling stock. Moreover, with a long list of properties under

its name, SingPost may be able to unlock asset value when the time is

ripe. We initiate SingPost with a BUY recommendation and S$0.93 fair

value, derived from the free cash flow to equity approach (cost of equity

8.8%, terminal growth 2%). SingPost has a dividend policy of minimum

S$0.05 per share a year, implying at least a 6.3% yield. Assuming SingPost

continues its S$0.0625 dividend per share in FY09, this would imply a

7.9% yield, which is attractive given its defensiveness.

In Post We Trust

Singapore Post Ltd

Low Pei Han(65) 6531 9813

e-mail: [email protected]

Year to Turnover EBITDA Net Profit EPS EPS Growth PER Net Div Yield

31 Mar (S$m) (S$m) (S$m) (cents) (%) (x) (%)

FY 07 436.0 168.2 139.8 7.3 - 10.9 6.9

FY 08 472.6 174.3 149.3 7.8 6.4 10.2 7.9

FY 09F 484.3 170.0 152.7 7.9 2.1 10.0 7.9

FY 10F 474.7 158.5 145.7 7.6 -4.6 10.5 7.9

Page 2 2 January 2009

Singapore Post Ltd

Table of Contents

Page

Section A Investment Case 3

I. Background in brief

II. Investment highlights

III. Risks

Section B Country Analysis and Macroeconomic Forces 9

Section C Industry Analysis 11

I. Singapore’s postal services sectorII. Global postal services sector

Section D Company Analysis 16

I. Business overiewII. Competitive positioning and corporate strategiesIII. SWOT analysis table

Section E Financial Analysis 22

I. Financial performance and forecastsII. Valuation and recommendation


Singapore Post Ltd

Section A: Investment Case

I. Background in brief

Singapore Post (SingPost) is the designated Public Postal Licensee for

Singapore. It provides domestic and international postal services, and is

also a logistics provider in the domestic market with global service offerings

to more than 220 territories/countries. Leveraging on its retail distribution

network with its post offices, self-service automated machines (SAMs)

and vPost, its internet portal, SingPost provides not only postal but also

agency and financial services.

II. Investment highlights

Dominant postal services operator. SingPost has been, and still is, the

dominant player in the postal services industry in Singapore. Although the

basic mail services market was liberalised in April 2007, SingPost still

holds the masterdoor keys to letterboxes provided by property owners and

developers, including those in HDB estates. As such, new entrants to the

industry either have to utilize SingPost's network or deliver mail door-to-

door, limiting pricing flexibility. With other advantages such as an established

distribution network, significant free cash flow, a monopoly over stamp issues

and an entrenched brand name, we believe that the liberalisation should

have a limited impact on SingPost.

Defensiveness amid uncertainty. We like SingPost for its stable operating

cash flows given its non-cyclical business. Historically, SingPost has

weathered economic downturns well, with flat revenues during the Asian

financial crisis and a marginal 2% fall during the SARS crisis. This is

especially relevant now given that the world is probably experiencing the

worst slump since the Great Depression, with companies going through

tough times in the face of falling demand and drying credit lines. SingPost

has stable operating cash flows (Exhibit 1), a strong balance sheet and

dominant market position. Management has reiterated its dividend policy

of a minimum of S$0.05 per share each year. Such factors render it an

attractive stock given the current volatile market conditions. SingPost has

also outperformed the general market over the past year in terms of share

price, excluding dividends (Exhibit 2).


Singapore Post Ltd

Exhibit 2: Share price performance

Source: Bloomberg

Exhibit 1: Stable operating and free cash flows

* Free cash flow (operating cash flow less cash capex)

Note: Chart excludes additional special dividend of S$0.10 per share paid out in FY06

Source: Company data

0

50

100

150

200

FY04 FY05 FY06 FY07 FY08

S$m

il0

1

2

3

4

5

6

7

S cents

Operating CF FCF* Div idend per share (RHS)

0

20

40

60

80

100

120

Jan

08

Feb

08

Mar

08

Apr

08

May

08

Jun

08

Jul

08

Aug

08

Sep

08

Oct

08

Nov

08

Dec

08

FSSTI SingPost


Singapore Post Ltd

Opportunities for growth. SingPost has been launching new services

and initiatives over the past few years, and latest ones include "ClickPost",

an internet-enabled one-stop mailing solution for customers and "A.M. Mail",

a time-certain service that bridges the gap between express mail and regular

mail. It has also leveraged on its wide retail network via partnerships with

companies such as GE Money, ERA Realty and Prudential. Direct mail

(junk mail) is a segment that SingPost is targeting for growth by capturing

a bigger slice of the advertising market share. According to SingPost, its

current share is 4-5% of the Singapore market, while counterparts in

developed countries such as the UK enjoy about 14% of their country's

market share. SingPost therefore believes it has potential to grow in this

area.

Potential boosts from assets. SingPost is able to unlock value from its

properties, and management has previously expressed interest in selling

its flagship building, the Singapore Post Centre (SPC), next to Paya Lebar

MRT Station. The group has also been selling some of its smaller properties,

such as HDB shop units at Boon Lay Place and Clementi Central for S$2.8m

and S$7.9m respectively. Though there are potential capital gains to be

reaped from such asset sales, the likelihood of more sales, especially that

of SPC, could be lower given the weakening property market. SingPost is

also repurposing some of its post offices such as its Tanglin Post Office

which has been converted into a lifestyle hub with tenants such as Friven

and Co, SunMoon Food Company, as well as The Wine Shop.


Singapore Post Ltd

Exhibit 3: List of major properties

* All are leasehold properties


Property Address Years

With

effect

from

Land

Area

(sq m)

Bldg

Gross

Floor

Area

(sq m)

Headquarters

Singapore Post Centre 10 Eunos Road 8 99 Aug 82 32,738 137,297

Post offices

Alexandra 110 Alexandra Road 99 Mar 92 2,305 802

Bukit Panjang 10 Choa Chu Kang Track 10 99 Mar 92 3,264 2,015

Killiney 1 Killiney Road 99 Mar 92 1,029 493

MacPherson 70 MacPherson Road 99 Mar 92 2,074 315

Pasir Panjang 396 Pasir Panjang Road 99 Mar 92 1,726 391

Serangoon Garden 54 Serangoon Garden Way 99 Mar 92 1,215 307

Serangoon Road 755 Upper Serangoon Road 99 Mar 92 1,353 3,012

Simpang Bedok 350 Bedok Road 99 Mar 92 1,134 329

Tanglin 56 Tanglin Road 99 Mar 92 2,622 2,678

Thomson Road 246T Upper Thomson Road 99 Mar 92 2,753 1,793

Others

Airmail Transit Centre 21 North Perimeter Road 30 Sep 00 2,903 8,862

Ayer Rajah Delivery Base 6 Ayer Rajah Crescent 30 Feb 96 4,401 10,274

Jurong Delivery Base 2 Kian Teck Way 30 Oct 95 4,016 3,574

Kallang Delivery Base 18 Jalan Lembah Kallang 30 Sep 98 2,761 6,850

Loyang Delivery Base 25 Loyang Lane 30 Oct 95 3,519 3,225

Woodlands Delivery Base 9 Woodlands Walk 30 Oct 95 3,040 2,393

Sustainability amid uncertainty. In a time and age when melamine is

appearing in milk and financial institutions are imploding, it is a tough call

to think of entities worth entrusting our assets to today. However, SingPost

is likely to appear on the list of trusted names given its consistent service

quality over the years in terms of speed and reliability. It also has a history

of paying out about 75-85% of its earnings and 70-80% of its free cash flow

every year in the form of dividends since 2004, after its IPO in 2003. This is

ideal as we prefer companies with free cash flow payout ratios below 80%,

demonstrating that the firm has catered a cash cushion to maintain its

dividend payments. SingPost has a dividend policy of minimum S$0.05 per

share.


Singapore Post Ltd

III. Risks

Spectacular capital gains unlikely. SingPost may not be attractive to

investors who are looking for spectacular capital gains, given its defensive

profile. As it has outperformed the market in the past year, its share price

has not plunged as much as others, so investors looking for quick gains

are unlikely to be satisfied with SingPost (unless SingPost gives a special

dividend when it sells its SPC building when the property market picks up).

Although management is looking at growth drivers across all its business

segments, it has singled out direct mail as an area they wish to further

develop. It is unlikely, however, that the direct mail market will grow

substantially in the short term given the current economic downturn as

companies may choose to curtail advertising costs. However SingPost

may be able to capture greater market share despite the slower market

growth in the short term.

Margins may deteriorate. With new entrants after the liberalisation of

the basic mail services market, we expect greater margin pressure. Profit

margin for 2Q09 was 31.0%, lower than 33.2% in 2Q08. As such,

management will continue to focus on cost management measures to

control its costs but we do note that easing inflation should help SingPost

mitigate its costs.

Exhibit 4: Margins

* Note: Lower PBT margin in 4Q08 partly due to S$4.9m impairment assessment for buildings


20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09

EBITDA margin PBT margin PAT margin


Singapore Post Ltd

Increase in terminal dues. The Universal Postal Union (UPU) has

reclassified Singapore as a "target country" (previously known as

"industrialized country") from its current category of "net contributor country"

for the purpose of terminal dues1

1

settlement, with effect from 1 Jan 10.

Singapore will have to apply the relevant terminal dues system from 2010

to 2013 and contribute to the UPU Quality of Service Fund. All this means

that net terminal dues payments (dependent on type and volume of mail,

and destination mix) will rise, therefore increasing SingPost's traffic

expenses. SingPost said it will apply to IDA for adjustments in postage

rates if necessary, but any revisions will require IDA's approval.

Other risks. Terrorist acts happen swiftly and unexpectedly, and such

threats should never be disregarded. Postal and express delivery operations

may be disrupted by the threat of anthrax attacks or mail bombs, whether

real or hoaxes, including other terrorism-related activities. Any such incident

could negatively impact SingPost's business and reputation.

1 Terminal dues refer to settlements for the processing and delivery of international mailbetween countries.


Singapore Post Ltd

Section B: Country Analysis and Macroeconomic Forces

Economic downturn will affect demand. Singapore, being the first Asian

country to enter into a technical recession, is expected to contract by as

much as 2% in the coming year, according to official estimates. The

Economist Intelligence Unit forecasts that Singapore will be among the

world's 10 slowest-growing economies in 2009, and sees it contracting by

2.2%. With such a backdrop, SingPost's businesses, especially the mail

and retail segments, are likely to be affected as well:

1) Public mail has been decreasingly steadily over the years with e-

substitution (Exhibit 5), while business mail volumes should decline

with slower business activity. Direct mail may be impacted by lower

advertising expenditure, but SingPost hopes to mitigate its slowdown

by capturing greater market share, as discussed earlier.

2) SingPost's retail segment comprises agency services and retail

products, as well as financial services such as remittances and

unsecured lending. With a weakening real economy, people are likely

to curtail their spending and decrease consumption.

Exhibit 5: Decreasing public mail volumes

* Stamped and franked


0

200

400

600

800

1000

FY04 FY05 FY06 FY07 FY08

million items

Public* Bulk Total


Singapore Post Ltd

Not all segments will be hit. Singapore's increasing foreign population

means that foreign remittances could grow, although money remitted home

could either rise (family members may need more money with the global

downturn) or fall (workers may be retrenched or suffer from pay-cuts).

SingPost revealed that its main customers are from the Philippines and

neighbouring countries, while Chinese and Indians form a smaller

percentage. Going forward, SingPost hopes to secure more customers in

the latter group to sustain the remittance business. SingPost also has six

pawnshops under the SpeedCash brand. Pawnshops are normally a reliable

bellweather of the state of the economy, as there is usually an increase in

business with more people looking for fast ways to get cash during an

economic crisis. With the economic downturn and projected rising

unemployment, pawnshops are likely to benefit.

Easing inflation may mitigate cost pressures. SingPost has been

experiencing cost pressures partly from rising labour costs which make up

the bulk (27%) of total operating expenses in FY08. It is unlikely that wage

and other costs increases will be substantial going forward given easing

inflation in Singapore and the current difficult operating environment which

has prompted firms to retrench workers. Fuel costs are also unlikely to

spike up in the near future (barring unforeseen circumstances) with lower

oil prices in light of the slowing global economy.

Exhibit 6: Inflation and labour & related expenses

Source: Company data, Bloomberg

26

28

30

32

34

36

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08

CY

S$m

il

0

1

2

3

4

5

6

7

8

%

Labour and related expenses SG CPI (RHS)


Singapore Post Ltd

Section C: Industry Analysis

As revenue from the mail business made up 77% of total revenue and 81%

of operating profit in FY08, we will examine this segment in greater detail.

I. Singapore's postal services sector

Slow growth in total mail volume. According to IDA, while total mail2

volume in Singapore enjoyed healthy growth in the 1990s, the average

growth rate in recent years has slowed to about 2% a year. Despite e-

substitution, SingPost experienced an increase in mail volume handled in

both domestic and international mail. In the longer term, once the economy

picks up, direct mail should be an important growth driver since there is

still room for SingPost's business to grow. However, as we weather the

current economic downturn, companies are expected to send out less

direct marketing mail. As such, mail industry growth is not expected to be

spectacular.

2 Includes domestic letters, postcards, and printed pages sent and received within

Singapore, and similar categories of international mail, both inbound and outbound.Excludes express letters and parcels.

Exhibit 7: Domestic and international mail volume handled (SingPost)

* (FY07/08 is for the period of Apr 07 to Mar 08)

Source: IDA


Singapore Post Ltd

Longest history in Singapore among the five existing firms. Although

SingPost was incorporated in Mar 92, its actual history actually dates back

to 1819 through its predecessors. Pursuant to a license granted by the IDA

in Apr 92, SingPost was the exclusive provider of basic mail services until

Mar 07. Swiss Post International Singapore was issued a postal service

license only in 2007. The others were issued licenses only in 2008.

Exhibit 8: Postal service operators in Singapore

Source: Company websites, IDA

Postal Service

OperatorPrincipal activities

Date of

issuanceRemarks

Spore Post Ltd

Provides domestic and international

postal services, and logistics services in

the domestic market with global offerings

Has a retail segment which includes

agency and financial services

1 Apr 92

Singapore's

designated public

postal licensee

Fuji Xerox

Spore Pte Ltd

Produces and processes documents,

provides document and knowledge

management solutions for businesses

and products include advanced colour

printers

18 Apr 08

Origin dates back to

1965 when company

was part of Rank

Xerox organisation

G3 Worldwide

Mail (Spore)

Pte Ltd

Provides international cross-border mail

services18 Feb 08

Joint venture between

SingPost, Royal Mail

and TNT Post (Spring

Global Mail)

Swiss Post Int'l

Spore Pte Ltd

Provides direct marketing, publication

distribution,

B2C dispatch of small items and

business mail services

1 Dec 07

Swiss Post

International takes

over SPI Mail

International Pte Ltd

WMG Pte Ltd

Provides direct marketing, publication

distribution, as well as print and

production services

24 Mar 08

Established in 1982

and aims to be a

leader in providing

fully integrated

marketing solutions in

Asia-Pacific

Basic mail is the only area of liberalisation. Basic mail refers to letters

and postcards, excluding express letters. Under the domestic mail segment,

SingPost is likely to encounter increased competition in the direct mail

business, although this segment has always been open to competition.

Among the other four postal service operators, it is possible that Swiss

Post International (S) and WMG may compete for market share in direct

marketing services. International mail (both inbound and outbound) is also

likely to face greater competition, as IDA's intention is to develop Singapore

as a regional printing hub and enhance e-commerce activities.


Singapore Post Ltd

Still has some exclusive rights. SingPost is the designated Public Postal

Licensee for Singapore, which means only it has access to letterbox

masterdoor keys, and the rationale behind IDA's decision is to protect mail

integrity in the public postal system and safeguard consumers' interests.

As such, new entrants to the industry either have to utilize SingPost's

network or deliver mail door-to-door, limiting pricing flexibility. SingPost will

also be the only one to issue national stamps and continue to be the

organization representing Singapore at international and regional postal

meetings.

Widening network. SingPost has also been increasing its reach to

consumers over the years. Its postal network (Exhibit 10) comprises post

offices, stamp vendors, SAMs and postboxes. Given the nature of the

business where convenience and easy access are among the main priorities

of the customer, SingPost's vast distribution network ensures that it has

the competitive advantage.

Exhibit 9: Original regulatory framework

Source: Company

SingPost's

services

Non-regulated

Mail

Domestic letters &

postcards

International letters &

postcards

Mail

Unaddressed ad mail

Mailing list etc

Printed papers

Small packets

Regulated

Logistics

Speedpost Islandwide,

Worldwide,freight

Warehousing, fulfilment and

distribution

Retail

Agency services

Financial services

SAMs

vPOST


Singapore Post Ltd

Degree of competition. Potential competitors are unlikely to compete

aggressively in the domestic mail market considering that they have to

utilize SingPost's access network since they do not hold the masterdoor

keys. As such, there is limited pricing flexibility. There could be more

competition in the international mail market but SingPost also has a joint

venture (Spring, set up in 2001) with TNT Post and Royal Mail for the cross-

border mail business. As for logistics, SingPost has admitted that this is a

highly competitive business but the group said it has performed well in the

past year by expanding its customer base in a variety of industries.

II. Global postal services sector

Postal service operators not spared. The financial crisis has affected

postal service operators around the world, including the United States Postal

Service (USPS), the biggest postal service in the world. The group posted

a net loss of US$2.8b for FY08, partly due to a 9.5b decline in mail volumes

to 202.7b pieces. The UK's Royal Mail has also said that its operations

"face additional risk from the squeeze in the UK economy" and from

businesses' and individuals' cost-cutting measures.

State of the worldwide postal sector. The postal sector is still very much

relevant and certain sectors are expected to grow. According to the UPU,

while growth in urgent mail is stagnating in industrialized countries, there

is still "tremendous growth potential" in emerging countries. Direct mail is

growing in both developed and developing countries. New technologies can

be utilized as means of increasing the interconnectedness among countries

and further integrating the postal offices around the world, therefore increasing

the points of access for ordinary citizens.

Exhibit 10: SingPost's postal network


0

500

1000

1500

2000

2500

Jun

06

Sep

06

Dec

06

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Postbox es Stamp v endors SAMs

Smaller branches Main branches


Singapore Post Ltd

Exhibit 11: Access to postal services

*Note: Estimates by region in 2006

- 81% of world population benefits from home mail deliveries

- 3% lack postal services

- Mail deliveries to post office boxes are mainly made in Africa and Arab countries

Source: UPU (Berne, Nov 07)

Exhibit 12: Worldwide postal revenue

* Note: World estimates in 2006

- Global revenue: 204.8b SDR3

o Rose by 13% between '05 and '06

o Growth in 76.4% of the countries in the world

Source: UPU (Berne, Nov 07)

Postal parcels

and logistics

serv ices

27%

Postal financial

serv ices

14%

Other products

7%Letter post

52%

3 SDR refer to special drawing rights, the basis for the international fees of the UPU. Thevalue of one SDR in terms of USD is determined daily by the IMF, based on marketexchange rates of a basket of major currencies.


Singapore Post Ltd

Section D: Company Analysis

I. Business overview

SingPost has three main operating divisions: mail, logistics and retail. In

the latest 2Q09 results, mail accounted for 72% of total revenue, while

logistics and retail made up 15% and 13% respectively.

Exhibit 13: Revenue breakdown


0

100

200

300

400

FY06 FY07 FY08

S$m

il

Mail Logistics Retail

Exhibit 14: FY08 operating profit breakdown


Mail

80.7%

Retail

5.8%

Logistics

6.0%

Others

7.5%


Singapore Post Ltd

Public Mail

Public mail consists primarily of stamped mail and franked mail. Stamped

mail is sent mainly by individuals and consists letters and postcards

(excluding express letters). Volumes have been declining due to substitution

by email and the Internet. Franked mail is used primarily by home offices

and SMEs as a method of mailing large quantities of mail of different weights

and sizes. Volumes have been declining as franked mail customers upgrade

to bulk mail.

Bulk Mail

Bulk mail consists of publications, direct mail, and government and business

mail. It is used as an efficient means of distributing large quantities of

homogenous mail such as invoices and promotional mailings. Processing

and delivery times are reduced as the customer's items and postage rates

do not have to be weighed and calculated individually.

Hybrid Mail

More bulk mail is being outsourced for printing and mailing as companies

focus more on their core businesses and competencies. Main customers

include financial institutions, telecommunications companies, and

government bodies, among others.

International Mail

There is increasing competition in the international mail market as new

competitors enter previously regulated markets in the world. International

mail volumes are also likely to be hit by the global economic slowdown.

Exhibit 15: Business areas


Mail

SingPost

Logistics Retail Others

Domestic

- Public mail- Publications- Direct mail- Govt & Business mail

- Others

International

- Incoming - Outgoing

Hybrid

(DataPost)

Speedpost

Warehousing,

fulfilment &

distribution

vPost

(Shop & Ship)

Agency

services

Financial

services

vPost

(Bill presentment /payment)

Property


Singapore Post Ltd

Philatelic

SingPost produces commemorative and special stamps as well as other

collectibles for tourists and the gift market.

Speedpost

Speedpost is a door-to-door express delivery service for documents, parcels

and freight. Speedpost Islandwide is a service within Singapore, Speedpost

Worldwide provides international deliveries, while Speedpost Freight

transports large or heavyweight shipments.

Warehousing, fulfillment and distribution

This is a complement to Speedpost and provides business customers a

one-stop logistics service. Fulfillment services include item collection,

wrapping, payment collection, shipping and invoicing.

vPost (shop and ship)

vPost is SingPost's online portal that offers a range of services including

shopping and shipping. Currently, customers can purchase items from

certain countries in the world and have them delivered to their doorstep.

Retail

SingPost sells a wide variety of postal and non-postal products including

packaging and stationery items. Customers can also pay their utility bills,

taxes, fines, license fees and other contributions as organizations outsource

payment administration to SingPost.

Under financial services, remittances and unsecured lending made up the

bulk of this segment's revenue while post-assurance and secured lending

accounted for the rest. With the credit crunch and economic downturn,

SingPost's lending business may improve as banks tighten their lending.

II. Competitive positioning and corporate strategies

Emphasis on quality. Instead of merely relying on a cost leadership model,

SingPost places great emphasis on service quality and worker productivity.

In FY08, SingPost continued to surpass the Quality of Serivce in mail delivery

set by the IDA by achieving more than 99% delivery by the next working

day for mail posted within and outside the Central Business District (CBD).

The group also achieved international recognition in the World Mail Awards

(Quality category) on the basis of increased productivity, discounts to

customers, lower incidence of damage and improved sorting accuracy and

delivery.

Productivity increases. Postman productivity has also increased from

2,923 to 3,130 items delivered per postman per effective man-day in FY08,

while productivity of mail processing officers grew from 5,765 to 6,307 items

sorted per processing officer (Exhibit 16). Going forward, SingPost aims to

pursue further efficiency improvements.


Singapore Post Ltd

More effective direct mail. SingPost also has a competitive advantage

based on its extensive network and proprietary database. SingPost's

updated data repository and clear understanding of the whereabouts of the

target audience is important in increasing the effectiveness of direct mail,

as mail can be sent to targeted customer segments. This increases the

response rate and cuts unnecessary spending for the corporate partner.

One-Stop-Shop service. SingPost is able to provide a one-stop service

for its customers through its mail, logistics and retail divisions. The group

has diversified its operations in the past few years with forays into

remittances and lending services, among others. New initiatives and joint

ventures have been undertaken as well, and the following exhibit illustrates

some in the past three years.

Exhibit 16: Productivity


0

1000

2000

3000

4000

5000

6000

7000

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

mail items processed per processing off icer per effect ive man-day

mail items delivered per postman per effect ive man-day


Singapore Post Ltd

III. SWOT analysis table

The strengths, weaknesses, opportunities and threats with regards to

SingPost have been discussed in earlier parts of the report, but just to

recap:

Exhibit 17: Key JVs and initiatives in the past three years

Date Action Description

15 Dec 08 Launched A.M. MailTime-certain service that delivers mail by

11am the next working day

20 Oct 08 Termination of JVJV with GPN International and Oce (refer to

3 May 07 below)

19 Sep 08Added new remittance

channel

New channel to the Philippines through the

Philppine National Bank

29 Apr 08Collaboration with ABN

AMRO

SingPost will distribute ABN AMRO's line of

credit, PostLine

28 Mar 08Launched Asian property

sercurities fund

Collaboration with Prudential Asset

Management

5 Feb 08Offered the SingPost Visa

Money Transfer service

First postal service provider in the world to

offer Visa remittance service

22 Jan 08New remittance service to

Indonesia

Collarboration with PT Bank Negara

23 Jul 08 Launched Dmrocket one-stop specialist Direct Mail service

2 Jul 07JV with Thai British

Security Printing

Set up JVC to provide laser printing and

enveloping statements, bills etc

4 May 07Cooperation agreement

with Hongkong Post

Provide data printing, enveloping and other

services

3 May 07JV with GPN International

and Oce

To engage in the business of Print-On-

Demand

23 Nov 06Collaboration with Pos

Indonesia

Four initiatives on channelling services,

remittances, logistics and direct mail

14 Nov 06Established unit trusts

distribution partnership

Collaboration with Prudential Asset

Management

29 Sep 06 Launched PostREALTYCollaboration with ERA Realty Network of

Hersing Corporation

23 Jan 06Launched Speedpost

Express

Premium express courier service with DHL

as a partner



Singapore Post Ltd

Exhibit 18: SWOT table

Source: OIR

Strengths Weaknesses

A. Dominant position in postal services industry

B. Stable operating and free cash flows

C. Able to leverage on wide distribution network

A. Slow growth in mail volume, the mainstay business

B. Limited upside for postage rates which is also

subject to IDA's approval

Opportunities Threats

A. New initiatives and diversification of services to

present more opportunities

B. Potential boosts from assets

C. Direct mail a market worth focusing but may be

affected in this downturn

A. Pricing pressures from increasing competition

B. Higher expenses from terminal dues revision

C. Economic downturn to affect demand


Singapore Post Ltd

Section E: Financial Analysis

I. Financial performance and forecasts

Good 2Q09 results. In SingPost's latest 2Q09 results, group revenue grew

by 4.1% YoY to S$120.7m with improved performances in all three business

segments. Mail revenue rose 2.8% on the back of higher contributions from

domestic, international and hybrid mail, as well as the philatelic business.

Logistics revenue increased by 6.4% due to growth in Speedpost, vPost

shipping transactions as well as warehousing, fulfillment and distribution.

As for retail, revenue rose by 8.6%, driven by financial and agency services.

The group's rental and property-related income grew by 39.3% to S$8.2m,

boosted by higher rental income from its headquarters, the SPC.

Forecasts. We are estimating a 2.5% growth in revenue in FY09, followed

by a 2.0% contraction in FY10. To recap, SingPost's revenue was flat in

the Asian Financial Crisis (1997/1998) but fell by 2% during the SARS

period (2003). As the property and rental market weakens, we are unlikely

to see a similar increase in SingPost's rental and property-related income

as compared to FY08. The leases in the SPC are staggered, and about

one-third of them come up for renewal every year. A check with SingPost

also confirmed that lease rates are softening. Margins are prone to downward

pressures with new entrants in the industry but management said it will

continue to focus on cost management measures. Easing inflation is likely

to help SingPost in this area as well.

Bonds are the only borrowings. SingPost's only borrowings is its

unsecured bonds of principal amount S$300m listed on the SGX-ST. The

maturity period is 10 years from 11 Apr 03 with fixed interest rate of 3.13%

per annum. This translates to a debt-to-equity ratio of 1.3 as of Sep 08.

There is solid cash flow protection due to its strong operating cash flows

(operating CF: S$173.7m, FCF: S$160.9m in FY08). Interest coverage using

EBIT/Interest gives a ratio of 16.1.

II. Valuation and recommendation

Upside potential with low refinancing risk. In view of its stable cash

flows, we value the group on a discounted free cash flow to equity basis

(8.8% cost of equity, 2% terminal growth), deriving a fair value estimate of

S$0.93. We have adopted a beta of 0.8 instead of Bloomberg's 0.6 for a

more conservative cost of equity. As our sensitivity analysis shows, even

with a higher cost of equity at 9.0% or lower terminal growth of 1.5%,

SingPost still has an upside potential sufficient for a BUY call. SingPost

has little capital expenditure (less than 5% of revenue every year, and has

been 2-3% historically) and its defensive business and strong cash flows

means it has little refinancing risk.


Singapore Post Ltd

Exhibit 19: DCF sensitivity analysis

Source: OIR estimates

cost of equity

8.6% 8.8% 9.0% 9.2%

terminal

growth 0.0% 0.80 0.78 0.76 0.74

0.5% 0.83 0.81 0.79 0.77

1.0% 0.87 0.85 0.83 0.81

1.5% 0.92 0.89 0.87 0.84

2.0% 0.97 0.93 0.91 0.88

2.5% 1.03 0.99 0.96 0.93

3.0% 1.10 1.06 1.02 0.99

Exhibit 20: Peer comparison

Source: Bloomberg, OIR

CompanyMarket

CapP/B

Div

Yield

Cur Yr (x) Next Yr (x) (x) (%)

Mail and Logistics companies

Deutsche Post Euro 0.12 14.4 19.7 10.7 1.3 7.6

Pos Malaysia MYR 2.02 1.1 11.6 11.1 1.2 2.5

Fedex USD 0.62 19.4 14.7 13.7 1.3 0.7

UPS USD 0.54 53.9 15.3 15.5 4.9 3.3

Average 15.3 12.8 2.2 3.5

Domestic high yields

Comfort Delgro SGD 1.45 3.0 16.1 13.8 2.0 3.6

SMRT SGD 1.65 2.5 15.4 14.3 3.7 4.7

SPH SGD 3.11 5.0 10.6 10.9 2.4 5.5

Starhub SGD 1.94 3.3 10.8 10.2 32.3 9.3

M1 SGD 1.48 1.3 8.7 8.8 7.1 9.8

Average 12.3 11.6 9.5 6.6

Average (both groups) 13.7 12.1 6.2 5.2

SingPost SGD 0.80 1.5 10.3 10.6 6.7 7.9

Price P/E

(Local currency $)


Singapore Post Ltd

Initiate with BUY. We initiate coverage on SingPost with a BUY

recommendation with a fair value estimate of S$0.93. We like SingPost for

its stable operating cash flows and dividend yield, and we think its defensive

profile will serve it well during this period of economic uncertainty. Although

mail volume growth may be crimped with a slowing economy and e-

substitution, SingPost has launched new initiatives over the years and

diversified into other business areas to pursue growth. SingPost is also

asset rich, and there is always the possibility of unlocking asset values

though this may be unlikely in the near future with a weakening property

market. SingPost has a dividend policy of minimum S$0.05 per share a

year, implying at least a 6.3% yield. Assuming SingPost continues its

S$0.0625 dividend per share in FY09, this would imply a 7.9% yield, which

is attractive given its defensiveness.


Singapore Post Ltd

Singapore Post Ltd's Key Financial Data

Spore Post Results 2Q08 2Q09 % Chg 1Q09 % Chg

Year Ended 31 Mar (S$m) (S$m) (S$m) (YoY) (S$m) (QoQ)

Revenue 116.0 120.7 4.1% 120.9 -0.1%

EBITDA 43.6 43.8 0.4% 47.2 -7.1%

Depreciation & amortisation -6.5 -6.5 -0.4% -6.6 -0.8%

Net interest expense -2.0 -1.7 -15.5% -1.7 2.0%

Associates 1.1 3.0 161.3% 1.0 183.2%

Others 11.5 7.3 -36.3% 8.4 -12.3%

Pre-tax profit 47.7 45.9 -3.8% 48.3 -5.0%

Tax -7.9 -8.4 5.6% -8.6 -2.6%

Minority interests -0.1 -0.1 -20.6% -0.3 -60.6%

Net profit 39.7 37.4 -5.6% 39.5 -5.1%

INCOME STATEMENT

Year Ended 31 Mar (S$m) FY07 FY08 FY09F FY010F

Revenue 436.0 472.6 484.3 474.7

Operating expenses -267.9 -298.3 -314.3 -316.1

EBITDA 168.2 174.3 170.0 158.5

Depreciation & amortisation -25.6 -26.4 -26.0 -25.2

EBIT 142.6 148.0 144.0 133.3

Net interest expense -9.5 -8.1 -7.3 -6.8

Associates 6.6 8.2 8.2 8.2

Others 26.8 27.5 33.2 35.2

Pre-tax profit 166.4 175.5 178.1 170.0

Tax -26.2 -25.8 -24.9 -23.8

Minority interests -0.5 -0.5 -0.5 -0.5

Net profit 139.8 149.3 152.7 145.7

Earnings per share (cents) 7.3 7.8 7.9 7.6

Fully diluted earnings per share (cents) 7.3 7.8 7.9 7.6


Singapore Post Ltd

BALANCE SHEET

As at 31 Mar (S$m) FY07 FY08 FY09F FY010F

Cash 69.0 104.1 149.2 185.4

Other current assets 69.8 77.8 81.6 81.4

Fixed assets 492.2 470.8 449.8 428.8

Other long term assets 88.3 94.7 94.6 94.5

Total assets 719.3 747.4 775.1 790.1

Current liabilities less debt 192.0 201.9 207.6 204.2

Debt 316.3 302.1 293.0 287.2

Other long term liabilities 21.8 17.8 16.1 14.5

Total liabilities 530.2 521.8 516.7 505.9

Shareholders equity 185.4 221.4 253.7 279.0

Minority interests 3.7 4.2 4.7 5.2

Total equity and liabilities 719.3 747.4 775.1 790.1

NTA per share (cents) 9.7 11.6 13.3 14.6

CASH FLOW

Year Ended 31 Mar (S$m) FY07 FY08 FY09F FY010F

Operating profit before working cap. changes 190.5 200.5 204.1 194.6

Working capital changes -2.4 4.3 1.2 -3.3

Income tax -27.3 -31.1 -23.9 -23.8

Net cash from operations 160.8 173.7 181.4 167.5

Capex -8.5 -12.8 -13.0 -12.3

Other investing flows 15.3 18.1 14.9 15.9

Investing cash flow 6.8 5.3 1.9 3.6

Change in equity 4.0 5.0 0.0 0.0

Net change in debt -40.0 -20.0 -9.1 -5.9

Dividends paid -105.3 -120.1 -120.4 -120.4

Others -10.6 -8.7 -8.8 -8.6

Financing cash flow -152.0 -143.8 -138.2 -134.9

Other adjustments 0.0 0.0 0.0 0.0

Net cash flow 15.7 35.2 45.1 36.3

Cash at beginning of year 53.3 69.0 104.1 149.2

Cash at end of year 69.0 104.1 149.2 185.5

KEY RATIOS

PER (x) 10.9 10.2 10.0 10.5

Price/NTA (x) 8.2 6.9 6.0 5.4

EV/EBITDA (x) 10.5 9.9 9.9 10.3

Dividend yield (%) 6.9 7.9 7.9 7.9

ROIC (%) 19.5 20.1 19.8 18.6

ROE (%) 75.4 67.4 60.2 52.2

Debt/Equity (%) 170.6 136.4 115.5 102.9

PE to growth (x) 0.8 1.6 4.8 -2.3

Source: Company data, OIR estimates


Singapore Post Ltd

For OCBC Investment Research Pte Ltd

Carmen LeeHead of ResearchPublished by OCBC Investment Research Pte Ltd

SHAREHOLDING DECLARATION:The analyst/analysts who wrote this report holds NIL shares in the above security.

RATINGS AND RECOMMENDATIONS:OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and tradingoriented.- However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-monthinvestment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10%from the current price; Sell = More than 10% downside from the current price.- For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from thecurrent price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from thecurrent price.

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