Highlights/ Comments

• More progress on e-commerce. POS has enhanced its e commerce service availability and quality through deploying cash on delivery (COD) and Credit Card on Delivery (focusing on Lazada customers) for parcel delivery. The initiative has started its pilot phase in Feb 2017. The group has also developed its first Digital Business Centre, co-operated with Shopee, at Bangi by March 2017 catering for e-commerce customers conducting its business activities.

• Integrated Processing Hub. The group has also planned to consolidate its Pos Mel and Pos Laju operations to better utilize its resources. RM100m is expected to be spent on this hub (which will expand the group’s sorting capacity to 300,000 parcels/day from 200,000 parcels/day). The facility would be located at Shah Alam with completion scheduled to be in end- 2018.

• Update on LCCT redevelopment. Management revealed that the group plans to redevelop the old LCCT into a Digital Free Trade Zone (DFTZ). This area would be developed into a regional hub for e-commerce providing warehousing and distribution facilities catering for global and regional e commerce online market places. The group is expected to bring in a JV partner on this project to manage its project risk.

• TNB coal project. The contract is already running with both of the ships utilized for the contract being chartered-in-vessels. Plans to execute the contract using own vessels are still intact and the group has already receved Letter of Offer from local bank for USD onshore loan facility for vessel purchase. The 2 vessels are expected to cost the group US$36m in total.

• Update on Pos Aviation. Full quarter contribution of Pos Aviation (formerly known as KLAS) has been seen in 3QFY17. Management updated that while its cargo handling and airline catering business remains profitable, its logistics division (KLB) is still in the red stemming mainly from RORO and challenging haulage businesses. Excluding intercompany loan interest, Pos Aviation is expected to contribute PBT of RM30- 40m p.a. to the group.

• Outlook: While the group’s expansion plans will ensure long term growth, near term catalysts are absent for the company. Long gestation period is also required for the group to show significant growth in earnings from all its growth initiatives.

Risks

• Inability to raise postal tariff;

• New services/products fail to mitigate declining mail volume

Forecasts

• Maintained.

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, run ahead of the earnings growth. Project execution risks remain for its multiple expansion plans.

Valuation

• Maintain SELL at RM3.36 based on unchanged 20x (in line with 20x Singapore Post is trading at) FY18 PER.

Source: Hong Leong Investment Bank Research - 13 Mar 2017