Highlights/ Comments

• Management remained tight-lipped on the huge fluctuation of PosM quarterly results. The significant jump in earnings within 1Q-3QFY03/15 remained unexplained. Nevertheless, management pointed out that PosM accounts should be viewed in annual context and not quarterly due to different timing of cost recognitions during the year.

• Management indicated setbacks on few of their initiatives (to boost revenue) which may potentially impede their targeted growth for revenue and earnings within the company’s 5- year Transformation plan – 1) Market acceptance on Direct mail has been slower than expected mainly due to lack of awareness and understanding of the product as well as competition from main stream advertising channel; 2) International transshipments faced lower margins and competitive pricings, relying on bulk volume; 3) Courier services remained driven by walk-in customers (vs. other couriers such as GDEX driven by commercial clients and ecommerce); 4) Ar-Rahnu pawnbroking business remained in gestation period with minimal contribution to the group. Management is satisfied with its current 100 branches and no further opening expected in the near terms; and 5) Financial services transactions have been relatively slow.

• Management highlighted further risk of margin squeeze when Universal Postal Union raised Malaysia status to ‘Developed Country’ (currently categorized as ‘Developing Country’), which will increase the cost of international mail delivery for PosM. Currently, PosM is engaging MCMC (Malaysian Communications and Multimedia Commission) for a potential tariff revision to account for the higher operational cost.

• Dividend policy (50% of net profit) remained intact, with no plan for special dividend payment despite the strong net cash position of RM450m (as at Dec 2014), which will be used to finance annual capex of RM100-200m.

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 the strong 3QFY03/15 earnings, we have increased our earnings projections for FY03/15-17 by 24-38%, after imputing for higher margins.

Rating

SELL

Positives

• (1) Plenty of growth opportunities, leveraging on DRB Group and newly acquired Konsortium Logistics; (2) Strong balance sheet; and (3) Strong earnings growth.

Negatives

• (1) Huge staff numbers; and (2) Highly regulated industry.

Valuation

• Despite a higher Target Price of RM4.80 (from RM3.65) based on unchanged 18x PE for FY03/16, we maintained Sell on PosM due to the unjustifiable high valuation, initiative setbacks and lack of corporate disclosure.

Source: Hong Leong Investment Bank Research - 20 Apr 2015