Gordon Growth Model on Singapore Post (S08.SI)

Singapore Post (S08.SI) is Singapore's postal service provider for over 150 years. To combat the trend of declining mail volume, the company had been diversifying into e-Commerce business. This was done primarily through acquisition of e-Commerce related companies like TradeGlobal and logistics provider like Jagged Peak.

Currently at a closing price of $1.80, Singapore Post has a market capitalisation of $3.88B and annual dividend of 7 cents. In this post, we shall attempt to gauge what is an appropriate valuation of Singpost using one of the valuation methods I learnt in school.

Gordon Growth Model

In earlier posts I used to value stocks, I projected EPS growth and applied suitable P/E to arrive at a value expected in the future. A new method I've actually learnt in my finance class in school is actually the Gordon Growth Model. Basically in the model, the intrinsic value of an asset is determined by the size and timing of all future cash flows, discounted to the present value using the asset's required rate of return. 

Hence, for a stock valuation, the future dividends of the stocks are discounted to the present to get the estimated stock price it should be today. 

Using Gordon Growth Model, the formula for a firm paying constant dividends is: 

Share Price = Constant Dividend / Discount Rate

Another scenario which a firm paying a constant dividend growth, and the equation is:

Share Price = Expected Dividend in a Year's Time / (Discount Rate - Expected Dividend Growth)

The Discount Rate we are talking about here is actually gotten using the Capital Asset Pricing Model (CAPM) and the equation goes like this:

Discount Rate = Risk-free Rate + Beta (Market's Rate of Return - Risk-free Rate)

Now we can start hunting values to fit into the CAPM equation. For risk-free rate, we can refer to the yield of Singapore's 10-year government bond, which currently stands at 2.47%. For market's return, we can refer to returns generated by STI ETF since inception in April 2002. The total annual return inclusive of reinvested dividend is 7.21%. Beta of Singapore Post can be found in Reuters and it is at 0.52. Substitute them all into the CAPM equation and the discount rate equals to 4.93%.

Which Dividend Model and Value?

To be conservative, the constant dividend model should be chosen. This is based on the dividend history where SingPost maintained a constant 6.25 cents dividend for 8 straight years. With the recent dividend at 7 cents combined with a discount rate of 4.93% = 0.0493, the expected share price actually comes up to $1.42. This is a far cry from the current $1.80. 

However, if you are actually optimistic about the dividends from Singpost, you can try estimating the share price using the dividend growth model. Since dividend did actually grow by 12% after 8 years, one can conservatively approximate that dividend grow by 1% annually. Using the constant dividend growth formula, the share price will increase to $1.80. This is practically the current price. 

Based on these two sets of share prices, one can conclude that SingPost is actually overpriced to fairly priced. In my opinion, with SingPost's acquisition spree recently, it is safer to guide for constant dividend since cash flow will be tighter.