Highlights/ Comments

• We attended Pos Malaysia’s analyst briefing and walked away feeling neutral.

• Stronger courier division. In 4Q17, courier volume grew by 27% while its top line rose by 24%, implying 3% drop in average courier fee charges. This is due to higher contribution from contract customers which yields lower compared to walk-in customers.

• To consolidate Pos Mel and Pos Laju. The group plans to merge its mail division (Pos Mel) and courier division (Pos Laju) to enable more efficient resource allocation. However, the integration is not without its challenges due to the 2 division’s different nature of route planning. The group has currently completed the planning system procurement from its vendors and the execution of the route integration would take place in 2H17.

• Retail outlets would serve Pos Laju eventually. Currently POS retail outlets are underutilized but the closure of the redundant outlets is difficult due to government mandate. Therefore, POS planned to implement modifications to some retail outlets to enable them to serve the fast growing Pos Laju business, which would improve the utilization of extra capacity in the business.
   
• More on collaboration with Lazada. Lazada would utilize circa 80% of POS old LCCT terminal space as an e fulfillment center (slated to be ready by September 2017). POS’s role would be providing warehousing space, custom clearance and pick & pack for Lazada. Its courier division would not be involved directly in this collaboration as Lazada would still be employing its existing business model of having multiple service providers.
   
• Gestation period could be longer than expected. While long term prospect of the business remains favourable with boom in e-commerce, we believe the gestation period of the business would be longer than our expectation as the group would face (i) higher fixed costs when Integrated Processing Centre (old LCCT) commence operation by 3Q17, would result in higher overheads and (ii) earnings drag from its RORO and aircraft service division in KLAS, which are still in the red.

Risks

• Inability to raise postal tariff;

Forecasts

• We revise our FY18/19/20 forecast downwards by 16.4/22.0/21.4% to account for higher losses from Postal and lower margins on Logistics (due to gestation period).

Rating

HOLD ↔

• 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

• Maintain HOLD with TP reduced to RM4.73 from RM6.08 previously post earnings adjustment pegged to unchanged 25x FY19 PER.

Source: Hong Leong Investment Bank Research - 1 Jun 2017