Results

• Below  Expectation  –  Reported  2QFY03/15  core net profit of  RM8.2m  (yoy:  -79.3%;  qoq:  -71.8%)  and  1HFY03/15  of RM37.2m  (-56.0%  yoy),  accounted  for  27.1%   of  our  and 22.9% of consensus  FY03/15  estimates.

Deviations

• Higher  than  expected  cost  structures  related  to  staff  and transportations ,  lower  net  interest  and  higher  effective  tax rate.

Dividend

• None.

Highlights

YOY:  Despite  revenue  increased  by  9.2%  to  RM346.2m, 2QFY03/15  core  net  profit  declined  by  79.3%  to  RM8.2m mainly  due  to  higher  operation  costs  related  to  staff (increased  number  of  staff  and  salary  adjustments)  and transportations  (related  to transshipments).

QoQ:  2QFY03/15  core  net  profit  declined  by  71.8%, outpacing  decline  in  revenue  by  6.1%.  This  is  mainly  due to  lower  business  volumes   of  mail,  retail  and  other segments.  With  POS’s  rigid  cost  structures  (high  fixed cost),  POS  relies  on  volume  growth  to  enjoy  economy  of scale.  As  volume  dropped  qoq,  margins  also  dropped  at significantly  faster pace  qoq.

YTD:  6MFY03/15  core  net  profit  dropped  by  56.0%  to RM37.2m,  dragged  by  higher  operation  costs  (+18.3% yoy)  as  compared  to  smaller  increase  in  revenue  (+6.6% yoy)

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

• Cut  earnings  by  25-36%  for  FY03/15-17,  after  adjusting for the higher  than expected cost structures.

Rating

SELL

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

Post  earnings  adjustments,  we  downgrade  PosM  to  Sell (from  Hold)  with  lower  Target  Price  of  RM3.65  (from RM4.60),  based  on  18x  P/E  for  FY03/16.  We  are concerned  about  the  increasing  cost  structures  coupled with the  downward  trend of mail segments.

Source: Hong Leong Investment Bank Research - 21 Nov 2014