Although the mail business is ultimately linked to the economy and will not escape unscathed from the downturn, the bulk of SingPost’s business should be quite resilient, with the core mail business (which accounts for almost 80% of revenue and profit) likely limited to a decline of less than 8% over FY2010-11. In the past recession, mail revenue fell only 2-4% a year, with the greatest weakness seen in international mail.

We estimate only 21% of revenue is truly vulnerable, namely incoming international mail, international Speedpost, non-remittance financial services and retail products. Overall, we have assumed an 8% decline in Logistics and Retail revenue over FY10-11 although certain segments, such as SpeedPost and distribution of financial services such as unit trusts and life insurance policies are likely to post deeper declines.

On balance, we have tweaked our FY10-11 forecasts down by 3-4% to account for a more conservative view on the growth outlook for the logistics and retail businesses. Our forecasts now call for a slower but still positive 3.5% growth in FY10 despite a 3.5% decline in revenue, as we expect SingPost to be a beneficiary of the 2009 Budget measures, specifically the Jobs Credit scheme and the lower tax rate.

Despite lower revenue, we expect margins to stay resilient as 80% of operating costs are readily adjustable with 25% of labour costs (temporary and contract workers) highly variable. In the last few quarters, labour cost increases have slowed from the double-digit levels of 2008 to just 4.9% in 3Q09. Volume-related costs are also expected to slow, especially as international mail volumes come down.

Despite the slowing economy’s likely impact on top and bottomline growth, SingPost remains extremely attractive as a dividend play. Management has committed to paying a minimum dividend of 5 cents a share. We suspect it can do better, given its strong cashflow and lack of investment needs, hence our forecast of 6.6-6.9 cents for FY09-10 (based on its historical 80-85% payout), leading to a yield of almost 9%.