SingPost's vaunted investment plan will eat into profit margins

Through S$4m yearly depreciation cost.

Maybank Kim Eng noted that Singapore Post's S$45 million investment upgrade to its mail sorting system is critical to long-term productivity and competitiveness, but warned that as a short-term side effect, the replacement will contribute additional depreciation cost that will likely "eat into the net profit margin by 60bps on our estimate once it is completed in 2014."

Here's more from Maybank Kim Eng:

Results in line. SingPost announced its 4QFY3/13 results yesterday. Despite the strong 25% revenue growth, net profit dropped by 15% to SGD26m mainly due to intellectual property rights write-off of SGD5.7m. On full-year basis, net profit dropped by 4% to SGD136m, in line with our estimate of SGD134m. We hold our view that SingPost’s transformation is not likely to result in material bottom line growth in short term. As a yield stock, current 4.8% dividends yield looks unattractive. We maintain our HOLD rating but change our TP to SGD1.28 as we roll forward our valuation base to FY3/14.

Revenue boosted by acquisitions. Singapore Post’s transformation seems on track. In FY3/13, SingPost recognized revenue growth in all business segments despite the continuous decline in letter volumes. The growth was mainly driven by consolidation of new acquired subsidiary Novation Solutions, General Storage and Famous Holdings.

Cost pressure remains. Despite respectable top line growth, FY3/13 net profit dropped due to the cost pressure. Even after stripping out the one-off items, core net profit only increased by 4% vs 14% growth in revenue. Core net profit margin dropped to 21.4% in FY3/13 from 23.4% in FY3/12. We expect the inflationary cost pressure will continue to weigh on margins and prevent significant net profit growth.

Investment plan will eat into margin in short term. SingPost recently announced its SGD100m investment plan into postal infrastructure, service and operational enhancements. As part of the plan, SingPost will spend SGD45m to upgrade its mail sorting system. We view this investment as necessary in the long term to improve the productivity and competitiveness. However since the old sorting system has been fully depreciated, the replacement will cause additional depreciation cost of around SGD4m per year and eat into the net profit margin by 60bps on our estimate once it is completed in 2014.

HOLD on valuation ground. SingPost’s current dividends yield of 4.8% is not very attractive relative to its historical average of 6.0%. Current 16.2x PER is also approaching historical high. Maintain HOLD.