Highlights/ Comments

• We came away from POS 1QFY18 briefing feeling neutral.

• Retail division incurred losses in 1Q18 mainly due to the reduction in commission for ASNB transaction handling. It was reduced to 35 basis points for deposits and 10 basis points for withdrawal from 50 basis points for both previously, resulting in revenue drop. Partially offsetting the weakness was the stronger insurance sales commission.

• Courier division continued to grow at 11% in 1Q18, broadly in line with its peers thanks to the growth in e-commerce volume. However, the growth posted seemed to indicate a slight slowdown in the growth in comparison to the expectation of 17% annual growth for its courier volume, raising concerns of potential cooldown in e-commerce driven volume growth. Nevertheless, we remain skeptical that the courier division growth would exceed 11% in the coming quarters on expectations of stronger volume upon festive seasons towards end of the year.

• Significant portion of its planned capex for LCCT fulfillment center (circa RM60-70m) has been spent in 2Q18, comprising of flooring upgrade, infrastructure and basic ICT systems. Remaining works to be completed include system integration by Lazada and installation of the racking system (completion in 2-3 weeks). Rental to be paid to Malaysia Airport would be exempted until Jan 2018 for transitional purposes and the group is expecting the fulfillment center to commence operations by 3Q18.

• On its transformation plan, the group has already installed 60 units of Ezibox (for 24-hour parcel pick up and drop off) and target to increase the capacity to 110 units by Dec 17. Most of the units would be installed at Petronas & Shell petrol stations to expand its pick up & drop off point network for better customer experiences. To date, 34 PosLaju offices has been renovated with equipment upgrades to better serve the e-commerce industry. The group targets to renovate all 86 offices by year end with similar upgrades.

Risks

• Inability to raise postal tariff;

• New services/products fail to mitigate declining mail volume

Forecasts

• Earnings forecasts for FY19/20 are raised by 7.6/5.8% to account for cost savings from the acquisition of 2 bulk vessels for TNB contract.

Rating

HOLD ↔

• E-commerce will anchor its long term growth as PosM is the primary beneficiary of the boom. Current growth can only be seen in its courier division and we expect its logistics division to benefit as well in the longer run. Meanwhile, drag from postal division remains a concern.

Valuation

• Post earnings revision, TP is increased to RM5.09 from RM4.73 pegged to unchanged 25x FY19 PER. Maintain Hold .

Source: Hong Leong Investment Bank Research - 7 Sept 2017