Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM1.21 based on 0.64x P/B, consistent with its historical average.

• We came away from Pos Malaysia's (Pos)’s analyst briefing yesterday feeling cautious with key takeaways as follows:
• 1. The company guided for revenue increment of RM10- 15mil/month driven by tariff revision effective from Feb 2020, assuming a 26% decline in mail volume (this is fairly consistent with our assumption of a 20- 23% decline in mail volume in FY20F). The company believes the higher revenues should stop the bleeding at the segment in FY20F (vs. our projection of a small loss still due to the continued cost escalation).
• 2. The company hope to grow its market share in the courier segment (we estimate Pos’ current market shares in the region to be at around 30%) by improving its service quality (ie. better customer experience, improve efficiencies and productivity) at a competitive price. Already, SendParcel (an online shipping portal that allows easier access to Pos Laju services for SMEs) was launched in August 2019 (with more services to be added in 2020), and more automated/semi-automated sorting machines are to be installed in its' distribution centres in FY20. The new/upgraded automated sorting system is expected to be able to process 60% more parcels per hour, and 1-2 hours saved per day.
• 3. On the other hand, Pos Malaysia will continue to contain its costs by rationalising its post office network (potential relocation, right-sizing or closure, or transform into e-commerce fulfillment centre). An entrepreneurship/crowdsourcing program (which converts a salaried mail delivery person to a volumebased/incentive-based mail delivery “contractor”) should reduce the cost per item delivered by 28%, while increasing the items delivered per day by 50%. The pilot program was rolled out in FY19. Thus far, more than 100 riders have been recruited for the program and Pos Malaysia hopes to increase the number to 1,000 in FY20F.
• 4. Meanwhile, Pos Malaysia continues to pursue divestment/monetization of its non-core businesses (ie. aviation engineering business, Ah-Rahnu business) and plough back the proceeds into its core-businesses (ie. courier, postal) to improve efficiencies and competitiveness
   
• We believe the main challenge for the company is its cost inefficiency as a result of a unionized workforce and its inability to significantly rationalize its extensive network of post offices. Despite the costs containment measures implemented in FY19, the operating costs still remain high. This was due to higher costs incurred at the beginning stage of the transformation plans, and some of the initiatives are still at an early stage which have yet to be able to show the full impact. Meanwhile, the courier segment continues to face intense competition, resulting in margin squeeze. However, at the current share price and valuations, we believe the market has priced in the bad news.

Source: AmInvest Research - 5 Mar 2020