SINGAPORE Company Report

MITA No. 013/06/2008

2 January 2009 Singapore Post Ltd

Initiating Coverage In Post We Trust
BUY 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
S$0.795 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
Fair Value: S$0.93 achieved a 4.3% YoY rise in revenue to S$241.6m but incurred a 1.5% fall
Stock Code: in net profit to S$76.9m. Excluding one-off items, underlying net profit was
Reuters: SPOS.SI higher by 11.5% at S$77.7m.
Bloomberg: SPOST SP
ISIN Code S08
Should remain dominant despite liberalisation. Despite the
Event: Initiate Coverage liberalisation of the basic mail services market in Apr 07, SingPost is still
in a strong position to remain as the dominant postal services operator.
Only it can hold the masterdoor keys to letterboxes provided by property
General Data
owners and developers, including those in HDB estates, as dictated by
Issued Capital (m) 1,926 the Info-communications Development Authority (IDA). With other
Mkt Cap (S$m/US$m) 1,531 / 1,064 advantages like an established distribution network, significant free cash
Major Shareholder flow, a monopoly over stamp issues and an entrenched brand name, we
SingTel (25.7%) believe that the liberalisation should have limited impact on SingPost.
Free Float (%) 74.2
NTA per share (S$) 0.118
Defensiveness amid uncertainty. SingPost has stable operating and
free cash flows given the nature of its business. It has also been increasing
Daily Vol 3-mth (‘000) 4,079
its dividend per share since its IPO in 2003 to S$0.0625 in FY08. With the
52Wk High (S$) 1.180
uncertainty in today's stock markets, its earnings are comparatively
52Wk Low (S$) 0.795 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
Low Pei Han
(65) 6531 9813 continues its S$0.0625 dividend per share in FY09, this would imply a
e-mail: LowPH@ocbc-research.com 7.9% yield, which is attractive given its defensiveness.

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

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

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 sector

II. Global postal services sector

Section D Company Analysis 16

I. Business overiew
II. Competitive positioning and corporate strategies
III. SWOT analysis table

Section E Financial Analysis 22

I. Financial performance and forecasts

II. Valuation and recommendation

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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).

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Singapore Post Ltd

Exhibit 1: Stable operating and free cash flows

200 7
6
150 5

S cents
4

S$mil
100
3

50 2
1
0 0
FY04 FY05 FY06 FY07 FY08

Operating CF FCF* Div idend per share (RHS)

* 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

Exhibit 2: Share price performance

120
100
80
60
40
20
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
08 08 08 08 08 08 08 08 08 08 08 08

FSSTI SingPost

Source: Bloomberg

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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.

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Singapore Post Ltd

Exhibit 3: List of major properties

Bldg
With Land Gross
Property Address Years effect Area Floor
from (sq m) 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
* All are leasehold properties
Source: Company data

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.

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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

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09

EBITDA margin PBT margin PAT margin

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

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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"
1

for the purpose of terminal dues1 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 mail
between countries.

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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

1000

800
million items

600

400

200

0
FY04 FY05 FY06 FY07 FY08

Public* Bulk Total

* Stamped and franked

Source: Company data

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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

36 8
7
34
6
32 5
S$mil

4
30 3
2
28
1
26 0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08
CY
Labour and related expenses SG CPI (RHS)

Source: Company data, Bloomberg

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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.

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

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

Source: IDA

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.

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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

Postal Service Date of

Principal activities Remarks
Operator issuance

Provides domestic and international

postal services, and logistics services in Singapore's
Spore Post Ltd the domestic market with global offerings 1 Apr 92 designated public
Has a retail segment which includes postal licensee
agency and financial services

Produces and processes documents,

Origin dates back to
provides document and knowledge
Fuji Xerox 1965 when company
management solutions for businesses 18 Apr 08
Spore Pte Ltd was part of Rank
and products include advanced colour
Xerox organisation
printers

Joint venture between

G3 Worldwide
Provides international cross-border mail SingPost, Royal Mail
Mail (Spore) 18 Feb 08
services and TNT Post (Spring
Pte Ltd
Global Mail)

Provides direct marketing, publication Swiss Post

Swiss Post Int'l distribution, International takes
1 Dec 07
Spore Pte Ltd B2C dispatch of small items and over SPI Mail
business mail services International Pte Ltd

Established in 1982
and aims to be a
Provides direct marketing, publication
leader in providing
WMG Pte Ltd distribution, as well as print and 24 Mar 08
fully integrated
production services
marketing solutions in
Asia-Pacific

Source: Company websites, IDA

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.

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Singapore Post Ltd

Exhibit 9: Original regulatory framework

SingPost's
services

Regulated Non-regulated

Mail Mail Logistics Retail

Domestic Unaddressed Speedpost Agency

letters & ad mail Islandwide, services
postcards Worldwide,
Mailing list etc freight Financial
International services
letters & Printed Warehousing,
postcards papers fulfilment and SAMs
distribution
Small packets vPOST

Source: Company

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.

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Singapore Post Ltd

Exhibit 10: SingPost's postal network

2500
2000
1500
1000
500
0
Jun Sep Dec Mar Jun Sep Dec Mar Jun
06 06 06 07 07 07 07 08 08
Postbox es Stamp v endors SAMs
Smaller branches Main branches

Source: Company data

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.

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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

Other products Postal financial

7% serv ices
Letter post
14%
52%

Postal parcels
and logistics
serv ices
27%

* 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)

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

Page 15 2 January 2009

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

400

300
S$mil

200

100

0
FY06 FY07 FY08

Mail Logistics Retail

Source: Company data

Exhibit 14: FY08 operating profit breakdown

Others
Retail
7.5%
5.8%

Logistics
6.0%

Mail
80.7%

Source: Company data

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Singapore Post Ltd

Exhibit 15: Business areas

SingPost

Mail Logistics Retail Others

Domestic Speedpost Agency Property

- Public mail services
- Publications Warehousing,
- Direct mail fulfilment & Financial
- Govt & distribution services
Business mail
- Others vPost vPost
(Shop & Ship) (Bill
International presentment
- Incoming /payment)
- Outgoing

Hybrid
(DataPost)

Source: Company data

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.

Page 17 2 January 2009

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.

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Singapore Post Ltd

Exhibit 16: Productivity

7000

6000

5000

4000

3000

2000

1000

0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

mail it ems processed per processing off icer per effect ive man-day
mail it ems delivered per postman per eff ective man-day

Source: Company data

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.

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

Date Action Description

Time-certain service that delivers mail by
15 Dec 08 Launched A.M. Mail
11am the next working day
JV with GPN International and Oce (refer to
20 Oct 08 Termination of JV
3 May 07 below)
Added new remittance New channel to the Philippines through the
19 Sep 08
channel Philppine National Bank
Collaboration with ABN SingPost will distribute ABN AMRO's line of
29 Apr 08
AMRO credit, PostLine
Launched Asian property Collaboration with Prudential Asset
28 Mar 08
sercurities fund Management
Offered the SingPost Visa First postal service provider in the world to
5 Feb 08
Money Transfer service offer Visa remittance service
New remittance service to Collarboration with PT Bank Negara
22 Jan 08
Indonesia
23 Jul 08 Launched Dmrocket one-stop specialist Direct Mail service
JV with Thai British Set up JVC to provide laser printing and
2 Jul 07
Security Printing enveloping statements, bills etc
Cooperation agreement Provide data printing, enveloping and other
4 May 07
with Hongkong Post services
JV with GPN International To engage in the business of Print-On-
3 May 07
and Oce Demand
Collaboration with Pos Four initiatives on channelling services,
23 Nov 06
Indonesia remittances, logistics and direct mail
Established unit trusts Collaboration with Prudential Asset
14 Nov 06
distribution partnership Management
Collaboration with ERA Realty Network of
29 Sep 06 Launched PostREALTY
Hersing Corporation
Launched Speedpost Premium express courier service with DHL
23 Jan 06
Express as a partner
Source: Company data

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:

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Singapore Post Ltd

Exhibit 18: SWOT table

Strengths Weaknesses

A. Dominant position in postal services industry A. Slow growth in mail volume, the mainstay business

B. Stable operating and free cash flows B. Limited upside for postage rates which is also
subject to IDA's approval
C. Able to leverage on wide distribution network

Opportunities Threats

A. New initiatives and diversification of services to

present more opportunities A. Pricing pressures from increasing competition

B. Potential boosts from assets B. Higher expenses from terminal dues revision

C. Direct mail a market worth focusing but may be C. Economic downturn to affect demand
affected in this downturn

Source: OIR

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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.

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Singapore Post Ltd

Exhibit 19: DCF sensitivity analysis

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

Source: OIR estimates

Exhibit 20: Peer comparison

Market Div
Company Price P/E P/B
Cap Yield
(Local currency $) 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

Source: Bloomberg, OIR

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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.

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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

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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

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Singapore Post 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 trading
oriented.
- However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month
investment 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 the
current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the
current price.
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Page 27 2 January 2009