Results

• Below Expectation – Reported 1QFY03/16 core net profit of RM27.6m (yoy: -4.7%; qoq: -72.2%) accounted for 22.6% of our and 19.2% of consensus full-year estimates.

Deviations

• Higher than expected cost structures related to staff and transportations.

Dividend

• None for the quarter. PosM had recently proposed final single tier dividend payout of 13.1sen for FY03/15 (matching previous financial year total dividend payout).

Highlights

• YOY: Despite revenue increased by 5.8% to RM368.8m, 1QFY03/15 core net profit declined by 4.7% to RM27.6m (excluding doubtful debt provisions of RM5m) mainly due to higher depreciation costs and operational costs related to staff (higher headcounts) and transportations.

• QoQ: 1QFY03/16 core net profit increased by 72.2% on higher EBIT margins (boosted by other segment – digital certificate sales).

• Comment: PosM continued to embark on its transformation strategy (new business initiatives and expansion) and spending on capex, which explains its relatively higher cost structures and lower margins. However, these initiatives are facing setbacks (slower than initial expectation). Recently PosM had awarded a contract to a related party (brother of Tan Sri Dato’ Sri Syed Mokhtar) to provide optimization and enhancement of WAN services for a period of 2 years, worth RM40.3m.

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 FY16-18 earnings by 6.2%-6.5% in view of the higher operational costs.

Rating

SELL

Positives

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

Negatives

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

Valuation

• We maintained Sell on PosM with lower Target Price of RM3.50 (from RM4.30), after earnings adjustments and lower FY03/17 P/E of 14x (from 16x), in view of the weakened market sentiment.

Source: Hong Leong Investment Bank Research - 25 Aug 2015