Singapore Post:Falling Mail Profits may worry

One of the favorite grandfather stock that gives good dividends on a business that is predictable and survives well in recession.

I won’t be doing a full review on this stock but would rather take a look at its nine month operating performance and give an opinion about it.

The key thing for investors looking to invest in it is:

Replacement of Mail Equipment in 2013-2014

Singapore Post would need some 150 mil of capital expenditure to replace their equipments then. The beauty of Singapore Post is that capital expenditure is normally pretty low.

Any business that makes 130mil operating cashflow and needing 10 mil in capex is good business. SingPost have 4 years to come up with 150 mil.

Will they cut their 6.25 cents div because of this? There is a chance but may not be likely.

Lets just say that this business the earnings and cashflow are pretty predictable.

Dividend payout for 6.25 cents comes up to full year 120 mil

Their Operating Cashflow  comes up to 170 mil

CAPEX will come up to 10 mil tops

170-120-10 comes up to 40 mil.

If they can maintain that for 4 years they should finance that 150 mil pretty well

Paying Higher Terminal Dues from Jan 2010

Effective Jan 10, Singpost has to pay higher terminal dues for international outbound mails, as Singapore is now re-classified as a developed country in the postal world. Management guided this could have an adverse impact of up to 5% on earnings, although they would try to minimize it.

How worried should you be of your dividend kanna cut? We take 170 mil in cashflow. An impact of 5% comes up to 8.5 mil.

As work out previously, an excess of 40 mil taking away 8.5 mil, you should still expect them to be able to fund your 6% dividend yield

Falling Domestic Mail Volume

Its for good reason that we say mailing is a sunset industry. Check out how much you as an individual sends out mail compare to in the 1990s without the internet.

But as much as we say it is a sunset industry, Singapore Post continues to survive. There are still alot of things you must send by mail.

Companies would need to send registered mail for documents and i believe that will form a large part of future revenue. However, i believe greater innovation might change the way information and goods are moved. This might present challenges as well as opportunities.

Individual mail should decline substantially.

From the 9 month report, mail have been falling. SingPost have been actively acquiring companies to diversify away their dependence on mail. While i dun expect mail to substantially decline to zero, it is a fact of life that the mail business might not be that defensive in the future.

Whatever they acquire will need to make up for the loss in profits and cashflow from mail. as you guys can see a 9 mil fall in mail profit is off set by a 5mil increase in logistics and property rental profits.

So we shouldn’t worry right? I beg to differ on this. We buy into Singpost for its good economics and it is something that we should always evaluate. If the mail segment is the segment that provides the defensiveness in a recession as people still need to deliver mails, then we should really think about how retail and logistics will be affected in a recession. My initial thoughts is that they will be adversely affected. Probably property rental might take some pressure off

Conclusion

Still in terms of risk vs reward, SingPost have many things going for it versus all these challenges:

1. 6.25 cents div bringing current yield to 6.1%. If you get it at a recession at 60 cents or 50 cents is even better! Your yield will be 8-9%
2. Still generating good cashflow vs capex. Probably one of the few companies in Singapore able to generate so much with its existing asset
3. Singapore Post headquarters not realised in value. Its a chicken and egg situation. But i would rather they milk more rental income on it rather than sell it. Perhaps if they sell it and pay a one time big big dividend this becomes a much more shittier business.
4. We need to observe if their logistics venture takes off. We need to observe if they can diversify away the risk of falling mail revenue and provide clear cashflow that dividend investors need. Postea is one business that i thoroughly don’t understand, we hope to see what good comes out of it.

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