Improving operational efficiency remains the key focus for Pos this year. Pos has invested into an interactive dashboard system, allowing management to easily track trends, performance of outlets, and many more. The IPC 1 extension is expected to be completed by July 2018 while the new IPC 2 is expected to be completed by August 2019, bringing total courier sorting capacity up to 500k parcels per day. Capex is expected to be RM300m per annum over the next two years (IPC 2 expansion RM80m, IT platform RM120m, and maintenance RM100m). We believe improvements in operational efficiency from the initiatives set out by management will be apparent only in the midterm (by 2022). We maintain Hold with a lower TP of RM3.40.

Digitalising analytical data. Pos has invested into a dashboard system as part of its efforts to improve the overall operational efficiency. Through this, all internal data will be configured into an interactive dashboard, allowing management to easily pinpoint trends within segments, track the progress of initiatives set out, track underperforming areas of the business, and many more.

IPC expansion. The Integrated Parcel Centre (IPC) 1 extension in Shah Alam is expected to be completed by July 2018. This extension will allow IPC 1 to sort up to 300k (from 112k) parcels per day. The new IPC 2, located near to KLIA, is expected to be completed by August 2019. This centre will increase the group’s courier parcel sorting capacity up to 500k parcels per day.

Capex moving forward. The exceptionally high capex of RM436.2m (historically c.RM120m) in FY18 were mainly due the purchase of the two second-hand bulk carrier vessels (RM141.3m) required to service the coal transportation contract awarded by TNB. Pos has budgeted capex amounting to RM300m per year up to FY20. FY19 Capex will be spent mainly on: (i) IPC 2 expansion (RM80m); (ii) IT platform upgrades (RM120m); and (iii) maintenance (RM100m). The capex will be funded by combination of the company’s cash and borrowings (up to RM250m).

Logistics to see a slight improvement in margins. With the purchase of the two bulk carrier vessels, Pos will be able to earn better margins on TNB’s coal transportation contract. This is however partially hampered by the Haulage business making losses amidst the competitive Logistics environment.

Other income in 4Q18. Management clarified that the increase in “Other Income” is not expected to recur on a consistent basis. As such, we considered the RM10m increase as an Exceptional Item.

Outlook. We believe improvements in operational efficiency from the initiatives set out by management will go through a gestation period before contributing positively in the longer term (estimated by 2022). Pos will continue to be dragged by its high fixed cost structure, sunset conventional postal services and stiff competition in their courier division against a backdrop of the e-commerce boom.

Forecast. We cut earnings forecasts by 5.2% for FY19 and 1.0% for FY20 as we adjust for: (i) higher interest expense from debt drawdown; and (ii) decrease in capex assumption from RM450m.

Maintain HOLD, lower TP: RM3.40 (from RM3.61) pegged to a 25% discount on Singapore Post’s FY19 PB Multiple, given Pos’s continued drag in earnings and on going re-structuring exercises.

Source: Hong Leong Investment Bank Research - 31 May 2018