- We upgrade Pos Malaysia (Pos) to a BUY, with a fair value of RM5.50/share, based on our DCF valuation. We have finetuned our FY15F-FY17F estimates and trimmed our fair value by 5% to account for some housekeeping changes.

- Pos’ 4QFY14 earnings came in at RM52mil (+129% QoQ, +59% YoY), bringing FY14 core net profit to RM161mil (+6% YoY), exceeding our and consensus’ estimates by 6% and 5%, respectively.

- Pos’ decent FY14 result was mainly contributed by the courier segment’s spectacular performance (operating profits up by 50%), as it continues to capitalise on ecommerce transactions. Its “others” segment similarly recorded a strong growth of 69.3% in its operating profits, due to higher contributions from printing and insertion services, as well as the new logistics business. Elsewhere, its mail segment saw a 5% improvement in its operating profit, while retail segment losses narrowed marginally.

- Sequentially, 4QFY14 recovered substantially from the weak 3QFY14, with EBIT margin improving by 6ppt to 15.7%, despite escalating operating expenses from higher transportation and staff costs. Overall, full year EBIT margin has also improved by 1ppt YoY to 14.7%.

- Hike in effective tax rate from 21% in FY13 to 29% in FY14 caused net profit growth to be muted. We expect to see a more meaningful bottom line growth going forward as the effective tax rate normalises at the higher rate.

- Moving on, we expect the courier segment to continually be the key earnings driver for Pos, through rapid expansion by capturing a bigger market share in high yielding businesses, such as e-commerce.

- As management strives to diversify its business away from traditional postal, growth in its other business segments such as Ar-Rahnu services, printing and insertion business, digital certificates and logistic services will also contribute more meaningfully to its bottom line.

- More importantly, we anticipate the rising operating expenses, especially transportation costs in the face of more subsidy cuts, to be negated by the robust growth of these segments.

- The share price has retraced by 26% since the high of RM6.00/share in November and 16% from RM5.29/share since the 3QFY14 result was released, underperforming the KLCI by 19ppt.

- The stock is currently trading at 13x FY15F PE, below its 5-year historical mean of 15x. This is at a discount to Singapore Posts’ PE of 20x.

Source: AmeSecurities