Pos’ 1QFY19 core earnings of RM4.2m (-89.1% YoY, -79.6% QoQ) were below our expectation and consensus, coming in at 6.3% and 4.1% respectively. This was mainly due to weaker than expected contributions from all the segments, and a higher than expected effective tax rate. Pos will continue to be dragged by its high fixed cost structure coupled with stiff competition in the Courier segment, which is its biggest earnings contributor. We believe improvements in operational efficiency from the initiatives set out by management will only be apparent in the longer term (estimated by 2022). We downgrade our recommendation on Pos to SELL with lower TP of RM3.03 (from RM3.40) to reflect the revision in our earnings forecasts.

Below expectations. 1QFY19 core earnings stood at RM4.2m, coming in at 6.3% of HLIB’s forecast and 4.1% of consensus. The weaker than expected results was mainly due to weaker than expected contributions from all segments and a higher than expected effective tax rate. No dividend was declared.

QoQ. Core earnings plunged 79.8% to RM4.2m (from RM20.7m) mainly due to: (i) lower contributions from the Courier, International, Logistics and Aviation segments; (ii) higher finance costs; and (iii) higher effective tax rate due to deferred taxation and increase in non-deductible expense as opposed to a tax incentive granted in 4QFY18.

YoY. Core earnings plunged 89.1% from RM38.7m mainly due to: (i) lower contributions from Postal Services, Courier, International, and Others segments; (ii) higher depreciation expense; (iii) higher finance costs; and (iv) higher effective tax rate due to deferred taxation and increase in non-deductible expenses.

Outlook. We are cautious on the near-term outlook of Pos as 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 40.7% for FY19, 38% for FY20 and 37.9% for FY21 as we adjust for lower contributions moving forward amidst intense pricing competition in the Courier, International and Logistics segments.

Downgrade to SELL, lower TP: RM3.03 (from RM3.40 previously) pegged to a 20% discount on Singapore Post’s FY19 PB Multiple to reflect the revision in our earnings forecasts. Improvement in Pos’ high fixed cost structure will only be apparent in the longer term while shorter term earnings will continue to be hampered by margin compression.

Source: Hong Leong Investment Bank Research - 27 Aug 2018