- We maintain our HOLD recommendation on Pos Malaysia (POS) with a lower fair value of RM5.20/share (vs. RM5.50/share previously), as we cut our FY15F-FY17F earnings by 7%-11% to reflect lower contributions from the mail segment.

- POS recorded a 1QFY15F core net profit of RM29mil (- 44% QoQ, -35% YoY) came in below expectations, accounting for only 16% of our previous full-year estimate and 17% of consensus’.

- As expected, no dividend was declared for the quarter.

- The weak result came on the back of weaker revenue from the group’s mail segment, which declined by 4% YoY. This was due to a higher base in the previous year that was due to volume contributions from the General Election 2013.

- Coupled with the fixed operating costs (which we believe comprise mostly staff cost) that remained high amid the revenue decline, the mail segment’s operating profit fell by 59% YoY.

- However, this was partially mitigated by the strong and consistent performance of the courier segment, which registered a revenue and operating profit growth of 23% and 21%, respectively. This was the result of the group’s ability to capitalise on the growing e-commerce market.

- Similarly, the retail segment’s revenue increased by 10% following increased contributions from insurance products and its Ar-Rahnu services. This led to a lower operating loss of RM13.5mil vs. -RM14.3mil a year earlier.

- We understand that, on average, the group’s 100 Ar- Rahnu outlets are yet to be profitable given the average age of the outlets is only circa 6-8 months. An outlet could take up to 18 months to break even.

- In the near term, we continue to expect the courier segment to be the key earnings driver for POS, as it captures a considerable market share in high yielding businesses, especially cross border e-commerce transactions that is gaining traction.

- However, in line with the management’s strategy to diversify its business away from traditional post, we anticipate growth in its other businesses such as Ar- Rahnu and logistics services, which would contribute more meaningfully to earnings in the longer term.

- The stock is currently trading at 17.5x PE of FY15F earnings, compared with its historical average of 15x.

Source: AmeSecurities