Investment Highlights

• We maintain our SELL recommendation on Pos Malaysia (Pos) with a lower FV of RM1.27 pegged to a PB of 0.6x. We now project wider net losses of RM67.9mil (9M), RM69.1mil and RM45.5mil in FY19–21 vs. our previous forecast of net losses of RM46.4mil (9M), RM28.4mil and net profit of RM3.1mil.

• Pos disappointed in Apr–Sep 2019 (6M) (it recently changed its FY to Dec from March; we use periods in months in this report to avoid confusion) with a wider core net loss RM43.1mil, vs. our net loss forecast of RM46.4mil and consensus loss estimates of RM31.9mil for Apr–Dec 2019 (9M). We believe the variance against our forecast arose mainly from Pos’ continued inability to contain the escalating operating expenses.

• Pos’ Apr-Sep 2019 (6M) revenue declined 5% YoY as all segments reported declines in revenues except for its courier and international segments.

• The courier segment’s revenue was flattish, mainly because of the rise in volume from contract customers partly offset by the lower walk-in customers’ volume. The international segment’s revenue rose partly due to a revision in pricing since April 2019. For the postal services segment, revenue was down 11% YoY due to a continuous structural decline in traditional mail volume (14% YoY vs. our 15% forecasted), largely due to electronic substitution.

• Its logistics segment saw lower revenue as a result of the completion of the Refinery and Petrochemical Integrated Development Project (RAPID) in Pengerang, offsetting the higher revenue in haulage and automotive logistics. The aviation segment recorded lower tonnage of cargo during the period, while lower printing and insertion business was included under the “others” segment.

• Operating losses tripled from a year ago, we believe, was mainly due to escalating operating cost, particularly staff costs and other operating expenses. The widened operating losses from postal services of RM170.2mil (vs. RM110.6mil a year ago) and the international segment of RM28.4mil (vs. RM8.4mil a year ago), more than offset the improved performance from the courier segment (+5% YoY) and logistics (+348% YoY).

• The outlook for Pos remains bleak over the short to medium term as it continues to face headwinds in most of its segments. The postal segment will suffer from cost inefficiency as the mail volume is on the decline while operating costs keep rising. A potential tariff hike, if it happens, will only be a temporary relief. Meanwhile, the courier segment continues to face price and cost pressures which are eating into its margins, as the sector is weighed down by overcrowding of participants (116 courier licence holders as at November 2019) and there is no sign of consolidation happening soon.

Source: AmInvest Research - 26 Nov 2019