- We maintain our HOLD recommendation on Pos Malaysia (Pos) with a lower fair value of RM5.80/share (vs. RM6.16/share previously), based on our DCF valuation.

- Pos recorded a 3QFY14 net profit of RM22.8mil (-43% QoQ, -56% YoY), bringing total 9MFY14F earnings to RM106.8mil (-10.3% YoY). This is below expectations, accounting for only 59% of our full year estimate and 62% of consensus’.

- The weaker earnings were due to a 7.2% YoY hike in operating expenses arising from higher staff costs and transportation costs, repair and maintenance expenses, and rental. Bottom line was also lower due to higher taxes, as well as higher zakat payment.

- We revise our FY14F-FY16F earnings downwards by 8%-10%, as we adjust our EBITDA to account for higher operating expense. We also raise our effective tax rate assumption from 25% to 28%.

- The courier segment continues to be the key earnings driver for Pos, registering an increase of 17% in revenue and 42% in operating profits. This is driven by the healthy growth of its online business transactions which resulted in higher on-demand customer revenue, contract customers, and parcels and prepaid items.

- However, the mail segment’s operating profits fell by 6.3% despite a 5% increase in revenue, due to higher staff costs, support costs and transfer costs. Its traditional franking and ordinary mail continue to contract by 5.7% and 4.4% respectively.

- Its Ar-Rahnu operation, which is still undergoing a gestation period, contributed to a marginally wider operating loss in the retail segment.

- Going forward, we expect Pos’ courier segment to continue driving the business forward, as it strives to increase its market share in the courier market. Pos currently commands a market share of 38% in the domestic courier segment. Furthermore, Pos has also indicated that it will introduce more customer-centric and innovative products to diversify its income from mail.

- Near term re-rating catalysts include:- (i) successful implementation of its 5-year strategic plan and bolstering its non-mail income; (ii) monetising its various strategic landbank, including the KL Sentral land; and (iii) successful outcome from the ongoing discussions to acquire potential Middle Eastern companies.

- At the current level, the stock is trading at FY15 PE of 16x - at parity with its regional peer Singapore Post.

Source: AmeSecurities