Investment Highlights

• We upgrade our recommendation on Pos Malaysia (Pos) to UNDERWEIGHT but maintain our forecasts and fair value of RM1.65/share (WACC: 8.6%, terminal growth rate: 1.5%) after attending a meeting with the company, as the share price had fallen by 43% since our SELL recommendation in Nov 2018.

• Key takeaways from the meeting are as follows:

1. Exploring the agency model to stem the bleed in postal services: The recent 3QFY19 results saw the postal segment nearing a 3-year streak of losses amid accelerating decline in traditional mail volume and its inability to fully reduce the number of post offices and rationalize its workforce. To mitigate losses from the postal services segment, the group is currently in the midst of discussion with a potential partner with 15K agents nationwide, planning to shift some services to agents and aiming to gradually rationalize the post office footprint (premises and staff) by 4QFY20 in phases.

2. Hopeful for a postal tariff hike but expected to only be a temporary relief: The group shared that it expects to receive an official answer from the MCMC regarding the possibility of a tariff hike by end-CY19. However, Pos is aware that the tariff hike will only be a temporary relief. Currently, more than 90% of mail delivered is business mail and the tariff hike might drive more businesses to go digital and will push businesses to opt out of mail services instead due to the higher rates charged.

3. Potential in insurance sales business through aggregator business model: In FY18, Pos’ insurance business continued to grow, increasing by 6% due to higher premiums per customer. Currently, the bulk of its insurance business is primarily motor insurance. Moving forward, the group is looking into the digitalization of its insurance business by moving to an aggregator model – where Pos will have a comparison engine on its site with options to “click-through” to the insurance carriers own sites and will be compensated by participating carriers through commissions. Furthermore, the group also shared that it might extend the types of insurance offered to include fire, personal accident, travel and etc. We note that this is currently only at the ideation stage with much more to be done in terms of getting more insurers on board and getting approvals from relevant parties.

4. Improving digital offerings: The group is currently revamping its existing digital platform, i.e. EziSend and its Pos mobile app, and is targeting to relaunch the platforms by July 2019. (i) EziSend — An online shipping tool designed particularly for e-commerce customers. The group shared its plans to rebrand EziSend into a web-based parcel aggregator for Pos Malaysia, allowing users to access to all their services in one platform, i.e. basic, standard and express services. Apart from that, the group also plans to move its services on EziSend from its current postpaid model which is limited to selected contract customers to a prepaid model, to increase customer stickiness. Other enhancements in the pipeline include the ability to fill and print out consignment notes at home or at the post office. The new EziSend is hoped to eventually tie in with the upcoming new mobile app to offer customers an omnichannel customer experience. (ii) Mobile app — As its mobile app was last updated four years ago, the group is planning to revamp its mobile app by adding new features such as allowing users to change or reschedule delivery times and ties in with EziSend to allow customers to generate a QR codes to print consignment notes from the convenience of their home or at the nearest post office.

5. Slow progress at the Digital Free Trade Zone (DFTZ): In 2017, Pos Malaysia collaborated with Lazada to invest in the pilot phase for the development of DFTZ’s e-fulfilment hub at the KLIA Air Cargo Terminal 1 (KACT-1). Since commencing operations in October 2017, Pos shared that the utilization of KACT-1 by industry players is still below expectations, with a view that in order for the project to take off, there is a need for other countries in the region to set up similar distribution centres to facilitate cross-border e-commerce trade. We opine that the full potential of the DFTZ’s impact on Pos’ courier segment remains cloudy as there is still a lot more work to be done.

• Although Pos has shared some of its plans to mitigate losses, we opine that these plans are still at its preliminary stage with more to be done to offset losses in its postal and other non-courier segments. We recommend an UNDERWEIGHT call on Pos and reiterate that the group faces the dual problem of cost inefficiency in its postal segment whilst structural issues impacting its courier segment’s margins remain.

Source: AmInvest Research - 6 May 2019