Investment Highlights

• We maintain a SELL for Pos Malaysia (Pos) but cut our DCF-based fair value to RM1.65/share (WACC: 8.6%, terminal growth rate: 1.5%) from RM2.48 previously.

• We input an assumption of RM39.1mil in net loss for FY19 (from a profit of RM23mil previously) following the continuous decline in the group’s two major segments.

• 9MFY19 core net loss of RM24mil fell below expectations, far off the mark of our FY projection of RM23mil and consensus RM21mil.

• Pos saw a second consecutive loss in its 3QFY19 as sales were insufficient to cover costs (resulting in a loss on the gross level) and margins for courier fell to a three-year low of 10%.

• The postal segment is nearing a three-year streak of losses that the company blamed on an accelerating decline in traditional mail volume. The strategy to mitigate this is unclear, as is the direction under the company’s new leadership.

• The courier segment failed to capitalize on last year’s Singles’ Day sales, as revenue dipped 4% QoQ and margins fell sharply to 10% from 22% in 2Q. Pos has always relied on the courier segment to keep things afloat but both sales and margins here are beginning to demonstrate volatility amid growing competition.

• For 9MFY19, Pos fell into the red with a core net loss of RM24mil vs. a profit of RM89mil in the previous corresponding period. The major problem continues to be the decline in courier earnings and ballooning losses from its postal services segment.

• Apart from this, other business areas are either seeing increasing losses (international and others) or an earnings improvement that is too marginal (logistics and aviation). The international segment has been slipping as foreign customers switched to regional options that are cheaper.

• Pos declared a dividend of 8 sen/share vs. 10.70 sen/share previously.

• 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.

Source: AmInvest Research - 28 Feb 2019