Investment Highlights

• We maintain our SELL recommendation on Pos Malaysia (Pos) with a fair value of RM1.33 pegged to a PB of 0.6x (previously RM1.16) after changing our valuation method to PB in view of Pos’ uncertainty in earnings ahead. We adjust our forecasts to account for the Pos’ recent change in financial year-end to 31 Dec 2019 from 31 March 2020.
• Pos’ 2QFY19 results (quarter ended June 2019) came in at a core loss of RM11mil, after stripping off a net loss of RM4mil mainly from net forex differences and interest on lease liabilities. The results account for 35% of the remaining 9M of the new FY19 vs 37% of consensus 9M estimates. Despite recording losses, the group enjoyed taxation benefits from certain profit-making segments and recognition of deferred tax asset for its unutilized capital allowances for the quarter.
• The larger operating loss of RM19mil in 2QFY19 vs. RM10mil profit in the preceding year, was mainly due to a deterioration in performance for its postal and international segments, coupled with higher cost of sales and operating expenses. While the postal segment continues to be weighed by dwindling traditional mail volume (-18% YoY) and high costs relating to the Universal Service Obligation (USO), the international segment suffered from lower transshipment volume. Meanwhile, the aviation segment recorded lower operating profit due to lower cargo tonnage handled.

• Pos’ group revenue was down 3% YoY as all segments reported declining revenues except for its courier and logistics segments. Courier revenue rose 10% driven by growth in the e-commerce sector and increased demand from online business customers, while logistics revenue was 1% higher from the haulage business of its newly-secured project.

• On a QoQ basis, 2QFY19 core loss narrowed relative to 1QFY19’s larger loss which was due to higher cost of sales and operating expenses from the one-off goodwill impairment in the logistics segment of RM39.6mil and provision for delivery charges of leased aircraft of RM44.0mil in the courier segment.

• Although we note Pos’ efforts to address its issues and improve its efficiencies, its outlook still remains challenging in the short term as its key revenue drivers which are its postal and courier segment (contributing 26% and 39% of group revenue respectively) continue to face headwinds.

• Its postal segment suffers from cost inefficiency while we reiterate our view that the potential postal tariff hike will only be a temporary relief to the segment’s woes. Meanwhile, the courier segment continues to face price and cost pressures which are eating into its margins. As such, we keep our SELL recommendation on Pos.

Source: AmInvest Research - 21 Aug 2019