Highlights/ Comments

• We attended POS 3Q18 analyst briefing hosted by their new CEO, En. Ishal Ishak and the management team. The following are the key takeaways.

• Courier division continued its revenue growth trajectory, achieving 9.9% YTD. Management indicated strong volume growth for the division which reached 56m in 9MFY18 as compared to 50m in FY17. We can expect volumes to pick up further on the back of the CNY period.

• Management highlighted that their courier division is ripe for a relook at the pricing structure especially for the contract customers (SME and corporation). Currently the bulk discounts offered are indiscriminate and static irrespective of the customer’s volumes and level of service required. This exercise should result in better margins for the courier segment. However management was coy on the exact timing of the implementation.

• The International division’s drop was namely attributed to decreasing transshipment volumes from China. To note, previously Malaysia was the transshipment hub for E commerce items from China to reach Europe via Turkey and Russia. However in recent times these volumes have found a direct route through Russia.

• JV between AirAsia and SATS: Whilst management acknowledges that there will be revenue lost to this new partnership from their aviation business, the scale of the impact is still unknown at current juncture. On the prospects of the tariff revision for postal services which was last adjusted in 2010, we do not expect near term tariff revision in 2018 prior to the election. Nevertheless, management has been actively engaging MCMC to discuss the matter.

• The newly appointed CEO, En. Ishal Ishak is targeting to improve all processes across group’s operations for better customer experience. However, we remain doubtful of the successful execution and subsequent translation into higher profits. Furthermore, POS will continue to be dragged down by its high fixed cost structure, sunset conventional postal services and stiff competition in their courier division.

Risks

• Inability to raise postal tariff;

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

• Sharper-than-expected decline in mail volume; and

• Staff union risks.

Forecasts

• We decrease our FY18-20 earnings forecast downward by FY18: 20% FY19: 12% FY20: 9% as we adjust for lower margins moving forward for its courier segment amidst intense pricing competition.

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 decreases to RM4.15 from RM4.73, pegged to unchanged 25x FY19 PER.

Source: Hong Leong Investment Bank Research - 28 Feb 2018