In what will represent only the second IPO from non-Japan Asia this year, SingPost has begun pre-marketing via joint leads DBS and UBS Warburg. The company is considered an ideal defensive equity story for the current environment with limited downside, an appealing dividend yield and high resilience to war torn markets. The main problem encountered so far is the ability of the lead managers and company to canvass investors face to face, with all pre-marketing currently being conducted by phone.
Under the present timetable, pre-marketing will finish at the end of next week and be followed by a week's breather when the leads will decide whether to press ahead. Roadshows are then provisionally scheduled to begin straight after Easter. Co-leads are CLSA, Morgan Stanley, OCBC, UOB and Daiwa SMBC, which will handle a Public Offer Without Listing (POWL) for the company in Japan.
SingPost is being spun out of partially government-owned SingTel, which will offer 40% to 60% of the company's equity in an all secondary share offering. With 1.9 billion shares outstanding this equates to an offering size of roughly S$400 million ($225 million) to S$600 million ($340 million). This is based on syndicate fair value assumptions of S$1 billion to S$1.2 billion and the application of an IPO discount around the 10% range. At the mid-point of syndicate valuations, this would imply pricing near 53 to 54 cents per share.
The deal is primarily being marketed as a yield play with the hope of coaxing investors into a relatively high p/e for a low growth stock because of the hefty dividend pay-out. Annualising nine-month earnings to December 2002, observers say the pay-out ratio will be 75%, equating to a dividend yield of 7% to 8%.
In p/e terms, the company is being marketed on a rough range of 10 to 11 times 2003 earnings. This would put it in line with other defensive stocks traded in Singapore, but below the property REITS, which are seen as its best pricing comparables. Observers believe the REITS rather than other postal stocks should be investors' main starting point as there are no direct international comparables in the sector.
Stocks such as Deutsche Post and Holland's TPG are said to have a much higher logistics component to their earnings, while SingPost is more of a traditional pure play with a highly visible earnings stream. For the nine months ended December 2002, mail accounted for 77.3% of its operating profit, compared to 4.4% for logistics, 5.2% retail and 13.1% other.
Nevertheless, indicative pricing is similar to international comps, which average p/e multiples of 11 to 14 times 2003 earnings, price to book values of two to three times and dividend yields of 4% to 5% in the case of Deutsche Post and 2% to 3% for TPG.
The REITS, on the other hand, are showing dividend yields of 7% (CMT), 8.5% (A-REIT) and p/e multiples of 14 times 2003 earnings (CMT) and 12 times (A-REIT).
The main difference lies in the pay-out ratio, since the REITS typically pay out all of net income as dividends. Observers say fund managers' main question so far has been the sustainability of SingPost's dividend. In the preliminary prospectus, management has given guidance that it intends to keep the current pay-out ratio until 2004, at which point it hopes to either maintain or increase it.
Given the maturity of its operations, it has virtually no capital expenditure plans and observers say the planned increase in gearing and concurrent interest payments will only reduce free cash flow from about S$150 million to S$135 million.
The biggest unknown, which might affect the dividend, are plans for international expansion. In the prospectus the company states that, "while domestic mail volume in Singapore has continued to increase in recent years, potential future growth is limited by the size of the domestic mail market and threat of electronic substitution.
"Therefore," it adds, "key elements of our mail strategy are reducing costs and achieving growth through developing value-added services and international expansion."
In July 2001, SingPost formed a joint-venture with TNT Post and the Royal Mail group to form Spring. This is a company, which provides global mailing solutions to large companies seeking to outsource international mail.
Spring recorded unaudited revenue of E263 million to September 2002 and has an approximately 30% market share of a sector worth about E1 billion per year and growing. Indeed, SingPost's international operations have grown rapidly in recent years from nothing in 2000 to 8% of net income by September 2002.
Where cost cutting is concerned, experts say SingPost is already extremely efficient delivering 99.4% of the 2.4 million daily mail items by the next day. It has, however, seen very little competition since the market was de-regulated, largely because of the high entry barriers to creating a distribution network. Unsurprisingly for a densely populated city state the company has a high ratio of mail deliveries per postman (2,000 per day).
War and atypical pneumonia notwithstanding, observers believe that SingPost is an extremely straightforward story to sell and should also entice fund managers with the lure of MSCI inclusion and the prospect of one of the largest free floats in Singapore.
