Thursday, February 21, 2008

Singpost valuation exercise

Preliminary studies on the dividend that singpost gives and the current dividend yield looks good, hovering around 5% to 6% (based on average prices) since 2003. Take a good look at the ROE and EPS, classic signs of deep (earn a lot) and wide (hard to penetrate) economic moat, most likely due to its monopolistic status of its postal license, which ends in 2007. Looking at their annual report for 2003, I'm glad to see that Singpost had already prepared for this eventuality. I'm probably going to take a good look at their plans for 2003 to prepare the company for deregulation of the postal services, and then see if what had been said had been done now.

More metrics:

Average yield (based on average yield) for the past 5 years (2003 to 2007) = 5.37%
Averaged dividend growth for the past 4 years (2003 to 2007) = 10.67%
CAGR for dividend growth = 10.45%

Average EPS over past 5 years = 6.15 cts per share
Average EPS growth rate for past 4 years = 6.50%
CAGR for EPS growth = 6.29%

Net margin approximately 30% since 2003
Average payout ratio = 0.81

To really understand the finer points of the model, I suppose you have to read the book. After messing around with the variables, I settled on three main things: first is that the EPS is 0.615, which is the average EPS over the past 5 years, second is the core growth rate which I tried between 5% to 7% (I based it roughly on the earnings growth rate), and thirdly a ROE of 50% to 80%. Here's the matrix of possible projected total return by fixing EPS at 0.615 and changing ROE and core growth.

Payout ratio of 0.81 or 81% is about right. Singpost's dividend policy is 5 cts per share or 80-90% of net profits, whichever is higher. Messing around with the variables give me a projected total returns (meaning capital + income) of around 10% to 12%, which is pretty close to the rougher "current dividend + future dividend growth" model of 15.82% (5.37% + 10.45%). Difference probably lies in the fact that I'm using historical average EPS of 0.615, whereas I should be using a forecasted future EPS. Doing so will add in less than 1% to my projected total returns, bringing it to a range of 11% to 13%.

Is it safe?

Looking at the current dividend yield of 5.63%, it forms nearly half of the total projected returns, which makes this dividend play rather safe (because the other half of the potential returns are not guaranteed, whereas this 5.63% is guaranteed as long as they give out the dividend). So far, this is one of the few companies that I see that had a strict dividend policy stated explicitly in its investor relations page. I've got more reason to believe that such a dividend can be maintained. I didn't want to go in depth to talk about the economic moat and the ROE...another time another day.

Singpost is a very stable business. Net margins is almost constant at 30% since 2003, though they are doing things better and better with ROE increasing from 23% to 84% in 2007. With EPS growing steadily, I think based on history, this should be a safe counter.

Will it grow?

So far, the company did not give any indications that their dividend policy is going to change. There could be a possibility that after selling their flagship HQ in paya lebar, they are going to give out one big fat dividend, and thereafter change their dividend policy due to higher cost (from rental of the sold premises) . But that is just pure speculation. Since the company had already planned for the eventual deregulation of the postal services, they had been going full gear into expansionary plans. Btw, Singpost is appointed as the Public postal licensee (whatever that means). A good thing to analyse here will be how their other revenue streams are growing.

Amid a possible global slowdown, even if the growth rate drops to 4%, it will still give a lowest potential total return of 9.1%. Pretty pessimistic viewpoint, but still reasonable returns. To me, anything more than 8% is pretty solid. More than 10% is great.

What's the return?

To summarise, a pretty pessimistic viewpoint will give a total return of 9%. But I think a more possible outcome is between 11% to 13%. Messing around with various combination, I found that:

1. $0.95 is an extremely good bargain for singpost, based on 5 cts per share dividend, 2006 earnings, ROE 50% and a core growth rate of 4% (which is lower than singapore's economic forecast) - this combination gives a total potential returns of 10% which I'm satisfied with.

2. I did a quick Free cash flow discounted model, based on a perpetuity rate of 4% (btw, that's pathetic and ultra conservative, meaning that singpost is growing slightly faster than inflation only) and a discounted rate of 6% (which I based it on EPS growth rate...feeling is that it's around there).

Intrinsic value turns out to be 1.284.

Given the steady and consistent showing by Singpost, I reckon a 20% margin is sufficient...$1.03.
If you're feeling pessimistic, try 30% margin...$0.900.

So there we have it: $0.90 to $0.95 is a very good buy based on both dividend and discounted FCF. While it is all very sketchy, upon reflection, I feel that I've understood the numbers more clearly. Going by feelings alone, I feel $1.00 itself presents a very good buying oppportunity because if it's really based on on 90 to 95 cts buy, it's a very pessimistic outlook. The point is this, the lower the price, the safer it is and the greater the potential returns.

Price in which you enter is everything!


Anonymous said...

Hi LP,

I like your valuation post on Singpost. This is one counter that I've been checking out recently, charts & ratios, and can't help feel enticed to invest in it. As an income investor whose interested in a stable, unexciting business & not punting the stock market, I was wondering if you could share any insights to this stock. Any comments, advice, suggestions'd be much welcomed. =)


la papillion said...

Hi K,

To be honest, I just sold it a few days ago at 1.13. I did that not because I've no confidence of singpost, but rather because I got it at a high price of 1.18. After all the dividends had been accounted for, I exited with a good profit. I do not think that the SG market would hold at this level, so at this moment I'm quite bearish.

I would want to enter it again, but not at the current price. I think my target range of 0.9 to 0.95 is still very valid, giving a yield of 6.8-7.2%. I would buy again around that price range if there isn't anything better.

To me, singpost is a very stead business with strong cashflows. However, do not expect it to do any better because the business isn't going to be growing locally. Their growth would be from overseas ventures. Thus, the dividend is not expected to grow. I'll be happy if they keep it at 6.5 cts per year.

The only catalyst that can cause a possible capital appreciation and a one-off special dividend is if they sell off their flagship HQ at paya lebar and do a sell and leaseback deal. Good for the stock, bad for the business though because they would have to spend money on rentals instead of collecting rentals. The location is also the interchange between the east/west and the circle mrt lines, and with the possible CBD located near there, it would only boom further.

Hope that I helped somewhat :)