Highlights

• Margins for the Transshipment segment suffered from higher transportation costs while transshipment charges are quoted in MYR with cost pegged to the IMF Special Drawing Rights (SDR). In the later quarters improvement in margins would be noticed as revenue would be quoted in USD.

• While courier volume registered double-digit growth YoY, operating margins shrunk due to higher fixed cost allocation due to increasing revenue contribution. Management plans to optimize its workforce through combining postmen and courier men work scope under a single role with potentially smaller are of coverage per worker, avoiding the recurrence of double trips which is inefficient for the business.

• The management has also presented 13 key initiatives to streamline and enhance efficiency of Pos Malaysia. Major initiative which caught our attention is the push into the high potential e-commerce space. 3 key pillars of growth are: (i) e-market place (ii) e-fulfillment and (iii) e-payment. Within these pillars, we opine that the push in e-fulfillment could be easily realized due to its expertise in the logistics aspects of e-commerce.

• This is in line with the proposed acquisition of KLAS-KLB to play a major role in providing total point-to-point services to support the demand growth from e-commerce players like Lazada, Alibaba & etc. KLAS-KLB already owns warehousing space which could be partially converted to be e-commerce ready and its freight forwarding business unit would also complement to its point-to-point services.

• While we believe turning attention to e-commerce is a sensible business move, the plan’s value accretion to the company remains uncertain in the medium term as the push into e-commerce requires solid business execution, heavy CAPEX requirements and possibly extended gestation period. At this juncture, we believe it is still premature to gauge the potential upside in its earnings. Near term earnings headwinds include slowdown in conventional mail segment and cyclical swings in transshipment business, coupled with higher overhead costs.

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 KLAS acquisition 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

• Upgrade the stock to Hold from Sell as recent sell down in the stock has priced in near term earnings weaknesses. Our TP is unchanged at RM2.41 pegged to CY17 12x PER.

Source: Hong Leong Investment Bank Research - 2 Jun 2016