- We re-affirm our BUY recommendation on Pos Malaysia (Pos) with a fair value of RM6.02/share, based on our DCF valuation.

- Pos recorded a 2QFY14 net profit of RM40.3mil (-8% QoQ, +32% YoY), bringing total 1HFY14 earnings to RM83.9mil (+25% YoY). We deem this to be in line with our expectations, making up 47% of our full year estimate and 49% of consensus’.

- Pos charted 1HFY14 net earnings growth of 25% on the back of stronger performance across all its business segments and lower depreciation/amortisation charges, despite a hike in all of its major operating expenses such as staff costs, transportation costs and raw material costs.

- As expected, the courier segment continues to be the key growth area for Pos, recording a 54% growth in operating profit, mainly driven by a boost in online transactions which resulted in a rise in on-demand customer revenue, as well as increased contract customers, parcels and prepaid items.

- Mail segment recorded an increase of 11% in its operating profit due to higher revenue for prepaid, registered mail, admail, direct mail, international mail and corporate mail, coupled with lower staff costs, support costs and transfer costs. Its traditional franking and ordinary mail continue to contract by 6.4% and 5.4% respectively.

- Its Ar-Rahnu services also appear to contribute positively to the retail segment. Lower depreciation expenses as well as higher storage fees from its Ar-Rahnu services led to a lower operating loss in its retail segment.

- Going forward, we continue to be positive on its courier segment and expect it to continue charting strong growth, as it attempts to capture a bigger market share for its higher yielding businesses, especially its e-commerce business.

- Its 5-year strategic plan, which sets out to diversify its business away from the declining postal business, is well on track, in our opinion. YTD revenue contribution from the mail segment declined to 55%, from 57% a year ago. Revenue contribution from the courier segment, on the other hand, picked up from 24% to 26%.

- Pos declared an interim dividend of 8 sen/share, similar to FY13. We forecast gross DPS of 19.2 sen and 21.5 sen for FY14 and FY15, respectively – translating into gross dividend yields of 3.7% and 4.1%.

- We remain optimistic on POS due to:- (i) the strong growth in the courier segment that would drive earnings in the near-to medium term; (ii) its aggressive strategy to diversify its business away from the declining mail segment; and (iii) strong balance sheet. The stock currently trades at a PE of 17x, at parity with Singapore Post’s.

Source: AmeSecurities