Newsbreak

Pos Malaysia (POSM) announced that it is acquiring the remaining 20% stake in Pos Ar-Rahnu from Bank Muamalat (BMMB) for a total cash consideration of RM1m based on “willing buyer- willing seller” basis. The RM1m is BMMB’s cost of capital.

Pos Ar-Rahnu was incorporated back in March 2012 with total capital of RM5m by both POSM and BMMB on 80:20 basis. The Ar-Rahnu business was an initiative by Pos, while BMMB was roped in due to its extensive knowledge on the Islamic pawn broking business.

Comments

We believe the exercise is part of DRB’s bigger restructuring and streamlining plan as DRB owns 100% of BMMB and 32.2% of POSM.

After a year of operation (Ar-Rahnu was launched back in July 2012) and supports by BMMB, POSM is confident of taking charge of the whole Ar-Rahnu operation.

POSM remains committed in targeting 100 Ar-Rahnu branches by end of FY14, by adding new pawn broking services at 30 post offices. To note that POSM has an extensive coverage in all parts of Malaysia (including rural areas).

However, we understand that Ar-Rahnu’s profits remained minimal and insignificant towards POSM’s earnings at this juncture. Management indicated the potential gold assets pledged for each branch is RM5m, with an interest charge of 1% p.m. (12% p.a.), translating into RM60m revenue annual contribution from Ar Rahnu.

POSM will be affected by the recent hike in fuel cost, after the government cut subsidies on petrol and diesel prices. Note that, transportation cost was ~RM120m or ~13% of operating cost in FY03/13.

With the recent spike in share price up to RM5.40, we would like to highlight to shareholders that the valuation for POSM has reached high of 17.4x FY03/14 P/E vs Singapore Post ‘s 16.2x FY12/14 P/E.

Risks

• Inability to raise postal tariff.
• Skyrocketing crude oil price/ Increase in fuel prices.
• New services/products fail to mitigate declining mail volume.
• Sharper-than-expected decline in mail volume.

Forecasts

Unchanged.

Rating

Under Review

• Positives – 1) Plenty of growth opportunities; 2) Strong balance sheet; 3) Strong earnings growth; and 4) Potential land conversion.
• Negatives – 1) Huge staff numbers; 2) Highly regulated industry; and 3) Fortunes are tied to crude oil price.

Valuation

• We are placing POSM under review at this juncture in view of the recent spike in its share price.

Source: Hong Leong Investment Bank Research - 1 Oct 2013