Highlights/ Comments

With the expansion plan  in place, PosM has been incurring steep increase in costs related to staff and transportation.

Staff:  PosM  staff  numbers  have  increased  substantially from 15.9k people at end-FY03/12 to 17.5k people (+10.1%) at  end-FY03/14,  in  order  to  support  the  growth  of  Courier Services.  Management  expects  the  hiring  to  increase further under its expansion plan.

Transportation:  Increased  substantially  in  FY03/14,  as PosM  fast  expanding  its  international  operations  (targeting the growing on-line business worldwide) b y 2HFY03/14.  We expect the cost on the uptrend, given PosM has to  pay  for the  higher  air  transportation  services  provided  by international partners.

Utilities:  PosM  also  incurred  higher  utilities  expenses, mainly from the revised  electricity  tariff rates (effective Jan 2014).  With  the  government’s  intention  to  continue  cutting subsidies,  we  expect  continued  increase  in  utilities charges (may applies to fuel costs as well).

Despite management’s upbeat sentiment on revenue growth especially from Courier segment, we believe PosM to be hit with high cost structures in the short term.

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 

Post incorporating numbers from PosM  Annual Report and updates from management, we  cut our earnings  forecast for FY15-16 by 18.2% and 28.6% respectively in view of the higher cost structures.  We introduced FY17 earnings forecast at RM170m (+11.2% yoy). 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 

• Maintained  Hold  on  PosM  with  lower  Target  Price  of RM4.60 (from RM5.00) based on 16x PE for FY03/16.

Source: Hong Leong Investment Bank Research - 19 Sep 2014