Sustainability of dividend
I like dividend stocks. The money is better in my pocket and tangible rather than getting stuck in the company balance sheet. That is the reason why I like Singpost so much. Having bought Singpost at $0.98 and yielding 6.25c dividend then, it was giving me 6.37% dividend yield. Recently, management raised dividend to 7c, amounting to 7.14% yield. While I welcome the dividend bump, I worry that it may not be sustainable. Many companies spam lots of dividend only to abruptly stop the flow of money when the cash pile depletes.I've compiled the changes in the cash pile of Singpost over the years and displayed it in the chart below.
As one can see, there is no definite pattern in the change of cash positions year to year. However, it can be seen that the data is skewed towards net increase. Even it out over the years, Singpost has actually increased its cash pile despite giving generous dividends. Increasing yearly dividend by 0.75c will only increase cash demand to the tune of $16.1m (based on outstanding shares of 2,146,774,225). That is less than 10% of the net cash increase during the latest financial year. Therefore, I would conclude barring unforeseen circumstance, Singpost is in good position to service that additional dividend payout.
P/E and P/B valuation
For the full year ended 2014, the EPS was 6.849c. Based on the price of $1.90, Singpost currently has a P/E of 27.7. The P/E is admittedly on the high side as I am more comfortable with stocks with P/E below 20.
Net asset value per share was 68.40c. P/B is 2.78. Similarly I'm usually not comfortable with P/B value above 1. When trawling the market for gems, I will look for P/B < 1 for safety margin and also for bargain.
From P/E and P/B valuation point of view, Singpost is indeed overvalued. A P/E of 27 is usually accorded to company with growth potential. Even though Singpost increased its revenue by 12% for the whole year, its underlying net profit only increased by 5.2%. This can be attributed to the low profit margin associated with the Logistics business Singpost is diversifying into. Mail segment is stagnating for a few years but is sadly, the cash cow of Singpost. Can such a high share price justify the high revenue growth but low bottomline growth of Singpost?
I would hold the stock myself since I bought it low and yield from my capital outlay is good. However, looking at valuations, Singpost is currently overpriced and there are better dividend yielding stocks out there.
Acquisitions and Disposals
In times of boom, companies had been known to go on an acquisition spree only to find that they had overpaid. Singpost, in its bid to diversify from its traditional mail business, had gone through a restructuring. The restructuring included acquisitions of logistics company and disposals of some traditional businesses, together with joint ventures and investments from Alibaba. I'm mainly concerned with the pace of acquisitions and the price that the management paid for the companies. Here's the rundown of the acquisitions and disposals Singpost did for the past year.
Acquisitions
- The Store House1
- Paid S$121,000 for 75% of shares with net tangible asset last recorded as S$11,000
- F.S Mackenzie2
- Consideration up to S$14.8m for entire paid up share capital
- Net asset value was S$5.4m
- Couriers Please Holdings3
- Acquisition at S$105m with prior net tangible asset recorded at roughly S$3m
- From the change in net profit after acquisition, it seems that Couriers Please Holdings added $9,417,000 to the net profit of Singpost (if assumption is correct, the P/E at which Singpost paid for Couriers Please seems reasonable)
- Famous Pacific Shipping4
- 90% holdings for NZ$3.6m with potential consideration up to NZ$8m because of potential earn-out consideration (don't really know what earn-out consideration is)
- Net asset value is NZ$816,104
- Hubbed Holdings5
- Quantium Solutions (Australia) acquired 30% of Hubbed Holdings for S$4.6m
- Quantium will get 5% more shareholdings if some pre-determined performance benchmark not met. If performance met, Quantium will pay an extra S$1.06m
- Net asset value of Hubbed Holdings is roughly S$1m
Disposals
- Novation Solutions & DataPost (HK)6
- Entirely disposed of both assets for $24,388,951
- Net tangible asset recorded as $19,214,000
- DataPost Pte Ltd7
- Sold 90% of shares for $39,299,511
- Net tangible asset was recorded as $30,690,000
I see that what Singpost paid was consistently much higher than the net asset value the acquired company possessed. However, I also feel that book value of company is not a good gauge for valuation the companies. Singpost itself is valued at nearly 3x P/B. Instead, the EPS of the company would be a better guide to see value. I will appreciate announcements to be like that of Couriers Please where impacts to net profits were shown. Looking at the announcement details, it would seem Singpost paid a reasonable price for Couriers Please and I would hope to extrapolate it to the other acquisitions.
With the exception of Couriers Please, the other acquisitions were relatively small and should not impact Singpost greatly if it was a bad investment. Furthermore, the capital expenditure for acqusitions is supported by disposals of companies whose considerations were significant.
From what I heard at Singpost's AGM, the M&A actions are not likely to stop just yet and there are more to come. Chairman was very supportive of the director that oversees M&A.
Earnings
As mentioned at the AGM, revenue rose 12% to the highest ever at S$920m. Underlying net profit similarly rose 5.2% to S$157m, highest ever. I am disappointed that profit has not kept up with the growth of revenue. This was actually mentioned at the AGM with one lady pointing out that net profit actually decreased. CEO of Singpost reasoned forcefully that in the process of transforming Singpost, there were many charges that cut into profits. They had to strip them out to show that the core businesses were actually doing well.
What was impressive about CEO Wolfgang Baier, was that he acknowledged the Mail business of Singpost was declining and never going back. 150 years of good business, it's not going to improve. Instead, Singpost had to transform to maintain its competitiveness. I liked his pragmatism and honesty. That is how problems get solved. Many management refused to acknowledge problems and refuse to change or improve. It was my first time attending an AGM and I was really impressed with the management, replying tough questions cordially and directly.
Conclusion
My confidence with Singpost remains strong especially after witnessing the strength of the management. On the day of AGM, it was announced that Alibaba invested a further S$279m in Singpost. Chairman kept reiterating that Alibaba was a tough investor to satisfy. Given that Alibaba had given Singpost their stamp of approval, I will likewise trust my investment in Singpost.
I will continue monitoring the growth of profit along with growth of revenue. It has been almost 2 years where profit growth had disappointed me. Perhaps at some point, I will realise Singpost is not going to be as profitable as before, but the time is not now.
Since buying Singpost at 2012, the dividends had paid almost 20% of my initial investment. Hopefully I will hold it till the stock pays itself. While I am not going to sell my holdings anytime soon, I think ultimately at $1.90, Singpost is overvalued and not a value buy for buyers. Dividend yield stands at 3.7% and while this is respectable, there are better companies out there that provides better yield and growth opportunities. Hence, people looking at Singpost, just pray it may drop. I may also increase my shareholdings if it ever drop low enough! (at least 5% div yield).
1. http://infopub.sgx.com/FileOpen/SGX_Ann.ashx?App=Announcement&FileID=307340
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