Results

• Below expectations – Reported 2QFY03/17 core net profit of RM5.7m and 6MFY03/17 at RM34.7m, accounting for 38.4% of HLIB expectation for FY16 and 38.8% of consensus.

Deviations

• Due to larger than expected losses from postal services business segment.

Dividend

• None.

Highlights

• YOY: Core PATAMI gained 7% YoY in 2Q17 driven by stronger courier revenue and EBIT on the back of higher e-commerce transactions. This is despite weaker YoY postal services revenue due to lower retail business top line and decline in mail volume.

• QoQ: 2Q17 core PATAMI plunged 80.3% due to (i) seasonally weaker courier volume and EBIT margins and (ii) weaker sequential EBIT and top line reported in the quarter driven by higher losses from postal services segment caused by lower mail volume and retail transactions and (iii) higher mix of revenue from lower margin international business which consist of transshipment volume.

• YTD: Cumulative 1H17 core PATAMI rose 14.7% mainly underpinned by (i) stronger courier volume growth due to higher e-commerce transactions YoY resulting in better profitability and (ii) higher sales volume of digital certificates, printing and insertions in the Others business segment. This is being partially offset by weaker postal services division revenue driven by lower mail and retail volume.

• Comment: PosM continued to be affected by the weakness in convention mail volume, while international transshipments business is relatively seasonal and opportune with low margins.

• Courier segment continues to grow as courier services demand is expected to improve in the coming years due to e-commerce boom.

• KLAS integration into the group is still work in progress and synergistic effect would only be seen in the longer term.

Risks

• Inability to raise postal tariff;

• New services/products fail to mitigate declining mail volume; and

• Sharper-than-expected decline in mail volume.

• Staff union risks

Forecasts

• FY17/18/19 core net profit forecast is cut by 5/8/5% respectively to account for weaker postal services revenue and profitability.

Rating

• SELL

• While we are still positive on its long term prospects for e commerce driven courier business, recent share price surge has in our opinion priced in the positives and we opine that earnings delivery could only be seen in the longer term.

Valuation

• Downgrade to SELL from BUY. TP is revised lower to RM3.36 from RM3.87 previously post earnings cut based on unchanged 20x FY18 PER.

Source: Hong Leong Investment Bank Research - 25 Nov 2016