Investment Highlights

• We maintain our forecasts but tweak out fair value (FV) down slightly to RM1.04 (from RM1.07 previously), to adjust for a 3% discount to reflect a 2-star ESG rating as appraised by us (Exhibit 1). Our FV is based on 16x FY22F EPS, valuing Pos Malaysia at a discount to its peer, Singapore Post’s with a forward PE of 19x to reflect Pos Malaysia’s tougher competitive landscape in Malaysia. We maintain our BUY recommendation.

• We came away from Pos Malaysia’s analyst briefing yesterday more assured that the company is on the right track. The key takeaways are as follows:

1. Traditional mail volume has hit the bottom. Pos Malaysia guided for flat traditional mail volume in FY21F (which is in line with our assumption). It believes the 24% contraction last year marked the end to the multi-year decline in traditional mail volume as it believes that the digitalisation of business mails has almost reached saturation. Thus far, it has seen flat traditional mail volume for the month of Jan 2021. Recall, despite the contraction in volume in FY20, the segment recorded incremental revenues of RM150mil driven by the postal tariff hike (with effect from February 2020).
    
2. Strong growth in courier segment. Pos Malaysia guided for another 20% growth in parcel volume in FY21F, on the heels of a 20% increase in FY20, driven largely by the rapid migration of consumers to online shopping, accelerated further by the pandemic (to 110mil units vs. 90mil units a year ago). The growth in FY20 was more evident in 2Q and 3Q where volume jumped 40% YoY. To be prudent, we are keeping our assumption of only a 10% growth in FY21F (from a significantly larger base in FY20).
    
3. Pos Malaysia will continue to strive to improve its service quality and profitability by: (1) boosting its courier capacity via the upgrading of its distribution centres, the investment in semi-auto sorting machines, the expansion of integrated parcel centres (IPCs) to other regions and the implementation of the crowd sourcing model for the last-mile delivery; (2) digitalising its retail services (i.e. provision of online services); (3) rationalising cost at its five mail processing centres; and (4) engaging with the regulators to ensure the industry's sustainability is taken into consideration in any reform.

• We are cautious on Pos Malaysia’s outlook in FY21F as it takes time for Pos Malaysia to recover market share loss and confidence due to the shutdown of its main parcel processing centre in Oct–Nov 2020, as well as for its operations to fully normalise/recover from the pandemic.

• However, looking beyond FY21F, the outlook for the parcel delivery segment (of which Pos Malaysia is one of the top three players in Malaysia) is positive underpinned by: (1) the structural and irreversible change in consumer preference towards online shopping; and (2) the freeze on new courier licences in Malaysia from Sep 2020 to Sep 2022 to ensure rational competition in the segment.

Source: AmInvest Research - 3 Mar 2021