SingPost rebound will take time to brew

It could take as much as three years before the company could rise out of the earnings red, predicts DBS.

Singapore Post is in the middle of a diversification transition, and has been ramping up its expenses to more fully develop its so-called digital and e-commerce segments.

Here's more from DBS:

Costs rose much faster than revenue. Operating expenses rose 14% y-o-y compared to revenue growth of 3%. Out of the S$14m increase in the expenses, about S$2.2m were incurred for upgrading talent, IT systems and operations. The rest of the increase came from higher labor, volume and admin expenses, which exceeded our expectations.

Our View. Lower FY13F/14F earnings by 5% each. We have not considered the impact of any potential acquisitions in our forecasts. The company is in the middle of a multiyear transformation as it tries to diversify into “digital services” and “e-commerce fulfillment” businesses.

Perpetual bonds accounted as part of equity. In Mar 2012, Singpost issued S$350m of perpetual bonds at 4.25% yield. This could be issued in anticipation of expiry of S$300m worth of bonds in Apr 2013.

Recommendation. 6.2% yield appears safe to us. With free cash flow exceeding earnings and dividend commitments, DPS of 6.25 Scts is safe in our view. We believe that it may take 2-3 years before we see any real turnaround in earnings at Singpost. Our DDM based TP remains at S$1.04 where we assume cost of equity of 6% and terminal growth of 0%.