Investment Highlights

• We downgrade Pos Malaysia (Pos) to a SELL from an UNDERWEIGHT with a lower DCF-based fair value of RM2.48/share (WACC: 8.6%, terminal growth rate: 1.5%) from RM2.70 previously.

• We cut our FY19/20/21 projections by 66%/39%/34% following a surprise loss by Pos in its 2QFY19 results, its first in nearly 10 years. This took YTD earnings to a core net loss of RM8mil, well below our FY19 projection of a core net profit of RM68mil and consensus estimate of RM69mil.

• Pos saw a core net loss of RM15mil in 2QFY19, citing lower revenue from its non-courier segments, an increase in cost of sales, operating and finance expenses. We distill it down to two big factors: the worsening of its non-courier segments and a pace of growth for its courier segment that cannot compensate for this.

• 2QFY19 revenue was flat on both YoY and sequential basis, as a climb in courier sales merely offset the declines in the postal services and logistic segments. This left Pos vulnerable to its high cost base: its cost of sales and operating expenses to revenue exceeded the 97-98% seen in the past four quarters.

• We believe there is too much pressure on the courier segment to keep things afloat. This segment has successfully kept momentum for the past three quarters (though 1HFY18 EBIT was 18% lower YoY) and margins have fortified, but the group’s underperforming segments have worsened over the same period.

• Postal services saw its worst quarterly loss in 2.5 years — the international segment falling into the red (after losing a major customer based in China) and the quantum of the contributions from the other segments was too insignificant to leave a dent. The international segment had been slipping (seeing a 3-year CAGR to FY18 of 22%) as foreign customers switched to regional options that were cheaper.

• We reiterate that Pos faces the dual problems of cost inefficiency for its postal segment and structural issues that challenge efforts to boost earnings from the courier segment. We cut earnings to account for a steeper decline for the former and a less bullish outlook for the latter.

• We believe our net profit projection of RM23mil for FY19 is suitably conservative given that revenue from courier could be stronger in the second half (with support from several festive periods) and Pos may take efforts to avoid the losses from the international segment to continue.

• However, we emphasize that it is crucial for the group’s new leadership to provide some guidance on the strategies to tackle the existing issues given its precipitous position now.

Source: AmInvest Research - 22 Nov 2018