- We downgrade Pos Malaysia (POS) to a HOLD rating with an unchanged fair value of RM5.50/share, based on our DCF valuation.

- Our downgrade is due to limited upside as the share price has risen close to our fair value. The stock has recovered by 22% to Friday’s close of RM5.40/share, since our rating upgrade in May.

- Based on its last traded price, the stock is trading at 16x PE FY15F earnings, circa 1SD above its 3 year historical mean.

- Mail revenue saw a decent recovery in FY14 (+7% YoY) on the back of increased volume in transshipment. Its direct mail service is also well accepted and experienced good growth, although this only less than 10% to total mail volume currently.

- The strong performance for the courier segment is expected to remain intact, driven by the robust market for e-commerce. As such, we understand that the segment will continue to see a larger contribution from walk-in customers which may contribute to slightly better margins, compared with the traditional contract customers. In FY14, POS saw approximately equal contributions from both walk-in and contract customers, but should see contribution from walk-in outstrip contract customers going forward.

- POS has achieved its target of 100 outlets for its Ar- Rahnu services. The business has yet to be profitable given the average age of its outlets is only circa 6-8 months old. We understand that an outlet could take up to 18 months to breakeven.

- Management also indicated that there are no immediate plans to expand its Ar-Rahnu services, and would instead only focus on growing its existing 100 outlets. Consequently, we do not expect the Ar-Rahnu to contribute meaningfully in the near term. We estimate a contribution of RM24mil p.a. to revenue upon all 100 outlets turning profitable.

- We do not expect a significant increase in dividend payout despite its cash pile of RM439mil, due to cash requirements for capex of RM150-200mil p.a. and requirements of RM1mil-3mil per Ar-Rahnu outlet for disbursements.

- In the near-to-medium term, the driving force for the business will continue to come from the robust growth of the courier segment on the back of the expanding ePOS has also been increasing its staff force steadily, in light of the expansion of its courier segment, although not as aggressive as before. Its total labour force currently stands at >17,000 pax against 16,200 pax as at FY13. However, impact will not be significant as most of its staffs are in the non-executive level.

- We downgrade Pos Malaysia (POS) to a HOLD rating with an unchanged fair value of RM5.50/share, based on our DCF valuation.

- Our downgrade is due to limited upside as the share price has risen close to our fair value. The stock has recovered by 22% to Friday’s close of RM5.40/share, since our rating upgrade in May.

- Based on its last traded price, the stock is trading at 16x PE FY15F earnings, circa 1SD above its 3 year historical mean.

Source: AmeSecurities