Investment Highlights

• We maintain our SELL recommendation on Pos Malaysia (Pos) after lowering our fair value to RM1.16/share with a WACC of 8.1% and terminal growth rate: 1.5% (previously RM1.34/share). The share price dropped 22 sen (-13.9%) overnight following the release of its 4Q results.

• We have also reduced our earnings forecasts and now project losses for FY20F and FY21F to account for depressed margin assumptions for its major segments after attending the group’s 4QFY19 analyst briefing.

• Key takeaways from the briefing are as follows:

• Introduced three key thrusts as Pos’ transformation plan to return to the black:

1. Active regulatory engagement in relation to the tariff rebalancing. The group believes that the tariff hike would be central to the self-sustainability of the postal segment to alleviate the effects of an accelerating decline in traditional mail volume and high USO costs as the tariff has remained unchanged since 2010. Through recent engagements, Pos is positive on receiving an official reply by the end of FY20.

2. Operating model innovations via:

o Establishing parallel new business targeting SMEs through partnerships e.g. Pos will focus on provision of first-mile and last-mile solutions for the SMEs while partnering with an e-commerce platform and a payment gateway to offer integrated SME solutions.

o Improving efficiency by consolidating all group transport activities under Pos ACE to allow for better end-to-end capacity planning and by realigning state operations to being customer-focused with the new structure being led by an experienced manager.

o Addressing last-mile concerns in major cities by:

(i) Crowdsourcing and outsourcing: Engaging riders and delivery personnel from agents as well as the general public and encouraging entrepreneurs’ participation by including more frequent payments i.e. on a weekly basis. The group has conducted a pilot project on this capability for one month at Wangsa Maju. Full implementation of crowdsourcing is targeted within the next 6 months.

(ii) Providing 170 parcel locker locations nationwide by June 2019: Instead of just catering to missed deliveries, these locations may also serve as pickup addresses for customers to collect their parcels at a more convenient time. The lockers will be placed near strategic areas such as universities, LRT stations and commercial areas.

(iii) Providing 24/7 self-service stations with current pilot sites within the KL/Selangor region.

o Expanding processing capacity to meet demand as IPC2 at the KLIA has been completed and will be able to process 230K/day while the capacity of IPC1 at Shah Alam is 300K/day. The combined processing capacity of 530K will be able to capitalise on the growth of the e-commerce sector. At peak, the aggregate capacity including all Pusat Pos Laju nationwide will be at 800K/day.

3. Elevating customer experience by having reliable systems, improving visibility via revamped digital and mobile apps and fixing basic customer main points. This ties in with increasing overall group productivity through digitalisation efforts such as improving its web platforms and mobile apps which will enable the creation of consignment notes and rescheduling of deliveries digitally as well as real-time tracking that would allow for better resource planning and improvement in last-mile execution. Meanwhile, the use of big data analytics will provide customer insights, thus serving them better while business insights will improve operations planning for Pos.

• Update on DFTZ: The group shared that 90% of trade are via sea whereas the DFTZ pilot at KACT-1 only currently caters for trade by air. After discussion with regulators, Pos is currently undergoing a 6-month pilot to allow for tax exemption of up to RM500 for goods that are processed through KACT-1 in order to boost volume. Current utilization at KACT-1 stands at 50-60%.

• FY19 profit dragged mainly by lower contribution for its courier, international and postal segments:

o Courier: Margins were impacted by one-off aircraft delivery costs of RM53mil, increase in staff and transport costs, and price competition despite higher volume (+15% YoY);

o International: Higher terminal dues due to being in the Universal Postal Union (UPU)’s target system;

o Postal: Accelerating decline in mail volume with persistently high USO costs.

• Swung into an LBT of RM158mil in FY19 vs. a PBT of RM117mil in FY18 due to:

o Total segmental losses of RM196mil attributed to: (i) one-off aircraft redelivery costs of RM63mil associated with its courier segment; (ii) higher terminal dues for its international segment due to being in UPU’s target system; (iii) salary adjustments due to collective agreements; and (iv) decline in group revenue of 5% YoY.

o Higher other expenses (up by RM44mil) mainly due to impairment of goodwill for Pos Logistics of RM40mil;

o Lower other income (drop of RM31mil) due to lower unrealized forex gain and lower write-back of doubtful debts;

o Higher finance costs & zakat (up by RM4mil).

• Although we believe that Pos’ transformation plan is a necessary step in the right direction, we remain concerned on the execution of its initiatives as a multitude of its efforts are still at the preliminary / pilot stage. We note that Pos outlook is still expected to remain challenging in the short term and thus maintain our SELL call on Pos as the deterioration of performance in nearly all its segments would mean that margin improvements need to be done at a more aggressive rate.

Source: AmInvest Research - 24 May 2019