Highlights/Comments

• Business offerings improved… Improvement in business offerings for POS has been seen since Dato’ Mohd Shukrie took the helm as CEO. Service variety has been widened with Prepaid Dropbox & Ezibox being added to their outlets. The group plans to add 50 units of Ezibox in multiple locations to upgrade service level. Other service enhancements that were recently added include Drive-thru POS outlets and mobile app for tracking to improve user experience.

• What’s next for KLAS? The KLAS deal announced earlier by the group is at its final stages of completion. POS has just commenced discussion with KLAS management team on its future business directions. KLAS businesses will soon be rebranded to represent POS’ identity.

• Meanwhile, the group is still contemplating on its capacity expansion options given that KLAS is already operating at full capacity. Currently there are 3 options: (i) capacity expansion for KLAS at KLIA but is limited due to space constraint (ii) total rebuilt of old LCCT terminal to be leased (highest CAPEX but location is the most strategic) and (iii) POS’ own space beside LCCT which involves higher towing costs. Total expected CAPEX for the expansion is circa RM60-70m which could be easily funded from the group’s cash pile.

• KLB, next pillar for e-commerce. The business case for KLB acquisition is its B2B logistics function which complements its current B2C-focused last mile services. In contrast to KLAS, surplus capacity is still present in KLB and the POS management is looking at several ways to reduce costs (through higher warehouse ownership which is cheaper). Integration of both courier and KLB would possibly expand its e-commerce business further given the widening of scope of their service offering to the online market places.

• Tariff hike in the cards? Rumours are rife that the tariff hike for mail business is being considered by the authorities. Documents have been submitted and the company is currently awaiting authorities’ approval. That aside, the group is also reviewing its courier business rates as they are currently below market average. Both would have direct positive impact on the group’s earnings once it comes into fruition. We have not imputed any of these until further confirmation.

Risks

• Inability to raise postal tariff;

• New services/products fail to mitigate declining mail volume

Forecasts

• FY18/19 core earnings are adjusted upwards by 17/19% as we factor in full year contribution from KLAS & KLB. Rating

• BUY

• Positives – (1) E-commerce 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 BUY from Hold previously based on higher TP of RM3.87 pegged to higher CY17 20x PER, which is higher than its 3-year average PER. Higher multiple is justified due to (i) prospects of tariff hike (ii) potential synergies from KLAS-KLB acquisition and (iii) group’s wide network to benefit from imminent e-commerce boom.

Source: Hong Leong Investment Bank Research - 19 Sep 2016