Results

Below Expectation – Reported 1QFY03/15 core net profit of RM27.1m (yoy: -37.5%; qoq: -48.2%) accounted for 16.1% of our and 15.4% of consensus full-year estimates, within expectations.

Deviations

Higher than expected cost structures related to staff and transportations.

Dividend

None.

Highlights

YOY: Despite revenue increased by 3.6% to RM368.8m, 1QFY03/15 core net profit declined by 37.5% to RM27.1m mainly due to higher operation costs related to staff (salary increments) and transportations.

QoQ: 1QFY03/15 core net profit dropped by 48.2%, outpacing revenue dropped by 13.1%. This is mainly due to lower volumes. With POS’s rigid cost structures (high fixed cost), POS relies on volume growth to enjoy economy of scale. With volume dropped qoq, margins dropped significantly qoq.

Risks

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

Forecasts

Unchanged, pending more updates from management.

Rating

HOLD

Positives – (1) Plenty of growth opportunities, leveraging on DRB Group and newly acquired Konsortium Logistics; (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

In view of rising share price performance since we last upgraded our recommendation to BUY in May 2014, we now downgrade our recommendation to HOLD with an unchanged target price of RM5.00 based on unchanged 16x FY03/15 P/E.

Source:Hong Leong Investment Bank Research - 22 Aug 2014