Highlights/ Comments

• POS has been offered by DRB to acquire DRB’s wholly owned KLAS (including KLB) and 9.916 acres of land (in Pekan HICOM) for a consideration of RM818.35m, subject to the complete capitalization of RM464.7m owned by KLAS to DRB and the novation of 100 acres of land (in Kedah) from KLB (owned by KLAS) to DRB for RM64.34m (completed back in Feb 2016).

• The transaction price of RM818.35m will be satisfied with the issuance of 245.75m shares by POS at RM3.33/share (vs. current share price of RM2.13/share). POS’s effective costs would be RM523.45m. Post the exercise completion by 2QFY17, DRB will increase its stake in POS to 53.49% (subsidiary) from 32.21% (associate).

• DRB will apply for exemption from Securities Commission Malaysia from undertaking Mandatory Take-Over Offer on POS post the disposal exercise.

• The proposal is subject to the approval of: 1) DRB shareholders; 2) POS shareholders; 3) Securities Commission; 4) Bursa Malaysia; 5) Ministry of Finance; and 6) Malaysia Communications and Multimedia Commission.

• KLAS registered RM8.3m net profit in FY03/15. With the capitalization of inter-company loan of RM464.7m, KLAS will record interest savings of RM23.2m (RM17.7m net of tax). The acquisition price of RM523.45m indicates ~20x P/E valuations (based net profit of RM8.3m and interest savings of RM17.7 net of tax).

• Despite the positive impact (business streamlining and synergistic benefits) at DRB group level on the exercise, we are relatively negative on the deal from POS point of view, given the high valuation.

• With the injection of KLAS and KLB into POS, POS may have to inject capital (POS has net cash of RM500m as at Dec 2015) into these units for expansion purposes, which will eventually limit the potential dividend payout of POS.

• Assuming potential earnings of RM26.0m for FY03/17 from KLAS, EPS dilution for POS would be 14.7% (based on additional 245.75m shares issued to DRB).

Risks

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

Forecasts

• Unchanged, pending completion of the exercise by 2QFY07.

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 (3) Highly regulated industry.

Valuation

• Maintained HOLD recommendation with unchanged Target Price of RM2.40 based on 12x P/E for FY03/17, on the potential earnings drag from the acquisition of KLAS.

Source: Hong Leong Investment Bank Research - 16 Mar 2016