Highlights/ Comments

• Earnings for 9MFY16 were mainly affected by transshipment business and staff costs (higher on the back of collective agreements with Pos labour union which is estimated to cost additional RM25m per annum).

• Transshipment contributed RM125m for 9MFY16 vs. RM35m for 9MFY15. However, net margin was low at 2-3% (vs. expectations of 8-10%), mainly due to RM depreciation (as revenue was charged in RM while cost structure was in Special Drawing Rights – basket of foreign currencies). Management managed to renegotiate for US$ denominated sales, which will improve its margins going forward. However, business volume may slow down given the higher effective pricing in US$.

• Management regarded the acquisition of KLAS group (including KLB) as an important part of its strategic future growth plan to become a key total logistic solution player in the country.

• The effectively lowered acquisition price of RM589.8m (based on RM2.40/share vs. original quoted RM3.33/share) reflects DRB’s commitment and confidence towards Pos long-term transformation plan post acquiring and consolidating KLAS group.

• Dilution impact is unavoidable, given the low earnings of KLAS group of circa RM25-30m per annum (additional 24.3- 28.0% to FY17 earnings) vs. additional share base of 245.75m (45.8% of existing share base) to DRB.

• We are positive on the long-term benefits of KLAS consolidation and extraction of synergies to diversify and boost earnings potential. However, we expect a gestation period of at least 1-2 years post consolidation (EPS drag), given the capex and expansion costs. We remain our reservation on the execution ability to reap full synergistic benefits from the consolidated entities.

• Pos has strong net cash position of RM500m, which will be utilized to finance its own capex of RM200m for FY17 as well as the expected capex for KLAS of RM50-70m and KLB of RM50m. On the other hand, dividend payout may be affected, another concern for shareholders.

Risks

• Inability to raise postal tariff;
• New initiatives 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) 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

Maintain 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 - 18 Mar 2016