Highlights/ Comments

• FY15 earnings was mainly affected by higher cost structures as the company expand its operations and products offerings. Its staff numbers increased by additional ~1,000 to ~18,500 headcounts during the financial year. Transportation cost also increased on the back of increased transshipment business and improved service coverages.

• Nevertheless, management guided for continuous cost cutting measurements such as process automations, implementation of better IT systems (a new system was implemented in March 2015), improvements in processes (including mechanism) and review (and redeployment) of resources and staffs.

• Direct mail volume remained low due to low market acceptance. Management remained positive on the potential of the new initiative (launched for 2 years) to counter the drop in conventional mail.

• So far, management has not seen material impact in mail volumes from GST implementation (effective April 2015), given that GST for conventional mail is zero-rated for first year while no changes for courier services from the change of existing 6% service charges to 6% GST.

• Revenue from expire of postal orders was RM1.3m in 4Q15 and RM27.4m in FY15 (RM25.5m was recognized in 2Q15). Management expects the contribution to be relatively stable at ~RM1m a quarter going forward.

• Management reiterated commitment in the implementation of 5-year transformation plan. Hence, no change in capex guidance of RM100-150m per annum.

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.

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

• Maintained Sell recommendation with unchanged Target Price of RM4.30 based on unchanged 16x PE for FY03/17. Despite management efforts, we remained relatively negative on POS outlooks given the continued margin squeeze (due to lower than expected mail volumes) and increased cost structures (expansion plans).

Source: Hong Leong Investment Bank Research - 5 Jun 2015