· We maintain our HOLD recommendation for Pos Malaysia (Pos) with a lower fair value of RM4.15 /share (vs. RM4.80 previously), based on our DCF valuation. We have trimmed our earnings estimates by 14%-17% for FY16F-FY18F.

· Pos’ 1QFY16 earnings came in at RM22.7mil (-16.1% YoY), below our estimates at 17%, and 16% of consensus.

· Pos’ revenue grew to RM390.4mil (5.8% YoY) on the back of continued >20% growth YoY in its key Courier segment. Courier continues to benefit from the flourishing ecommerce industry in the region. On the other hand, the declining Mail segment enjoyed a small revenue growth of 1.2% due to higher transshipment revenue.

· Overall, Pos’ reduced net profits are due to additional labor and transportation costs needed to cope with the higher volumes, particularly in Courier. The higher fixed labour costs from the additional ~900 staff hired in FY15 continued to weigh in on positive revenue growth.

· On an EBIT level, Courier’s contribution declined slightly on the back of a low base to RM18.1mil (-10.5% YoY). Similar to the last quarter, Courier margins remained compressed at 13.8%, as compared to 18.7% from a year ago, whereas Mail’s 1QFY16 EBIT rose slightly to RM19.8mil (+9.1% YoY) from its higher transshipment business.

· Going forward, Courier’s revenue growth will continue to drive Pos’ earnings, and mitigate its higher operating leverage. Management indicated that the larger workforce is geared up for Courier’s volume growth in the upcoming years and is not expecting significant new additions. Hence, we expect margins to improve in the coming quarters. In addition, we expect better efficiencies from its integrated parcel centre which is currently undergoing commissioning, as well as some additional value from lower fuel costs in FY16-FY17 onwards.

· A potential downside for Pos is that transshipment will decline after this year due to less favorable rates from the new Target system being implemented by the United Postal Union. The key upside risk for Pos remains its ability to raise its Mail tariffs, although it is only expected in FY16/FY17 if successful. Last revision was in FY10.

· Looking ahead, Pos still reiterates that it is committed to its five-year strategic plan to diversify away from post towards its goal of becoming a regional postal and logistics player.

· Valuation-wise, Pos currently trades at 14x PE, 1SD below its 2.5 years historic PE band range of 15x-20x, while Singpost trades at 22x PE. 

Source: AmeSecurities Research - 25 Aug 2015