Results

• Within Expectation – Reported 3QFY03/16 core net profit of RM24.9m and 1HFY03/16 at RM54.8m, accounting for 70.6% of HLIB expectation for FY16 and 63.6% of consensus (below expectation).

Deviations

• None.

Dividend

• None.

Highlights

• YOY: Despite higher revenue of 38.1% YoY to RM494.6m (driven by transshipments and courier), 3Q16 core net profit declined by 45.6% to RM24.9m on higher operational costs related to staff (higher headcounts) and transportations as well as depreciation costs.

• QoQ: 3Q16 core net profit improved significantly on volume improvements for transshipments and courier, likely due to seasonally stronger year end.

• YTD: Despite higher revenue of 19.6% YoY, 9M16 core net profit dropped by 34.0% to RM54.8m (excluding RM25.5m gain from expiry of order post in 1H15) on higher operational costs on staff and investments for expansions.

• Comment: PosM continued to be affected by the slump in convention mail volume, while transshipments business is relatively seasonal and opportune with low margins. The on-going concern for PosM is the acquisition of KLAS-KLB (from major shareholder DRB-Hicom) at high valuation, which may cause severe dilution impact as well as potentially lower dividend payout for PosM minority shareholders.

Risks

• Inability to raise postal tariff;
• Rebound in crude oil prices;
• New services/products fail to mitigate declining mail volume; and
• Sharper-than-expected decline in mail volume.

Forecasts

• Unchanged.

Rating

HOLD

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; (2) High rigid cost structure; and (2) Highly regulated industry.

Valuation

Given the severe drop in share prices since our last downgrade, we upgrade PosM to HOLD with unchanged Target Price of RM2.40 based on FY16 P/E of 12x (after 20% discount to existing 15x given the uncertainty from KLAS-KLB acquisition exercise).

Source: Hong Leong Investment Bank Research - 24 Feb 2016