Pos’ 1HFY19 core net loss of RM13.1m was heavily below our expectation and consensus. This was mainly due to higher than expected operating expenses from the Postal Services and International segments. Management did not pinpoint any specific reasons towards the increase as of now, but we believe it will be highly unlikely for Pos to turnaround on its operational efficiency in the near-term due to its high fixed cost structure. We maintain our SELL recommendation on Pos with a lower TP of RM2.55 (from RM3.03) to reflect the revision in our earnings forecasts amidst the challenging operating environment.

Below expectations. 1HFY19 core net loss of RM13.1m was heavily below ours and consensus forecasts. The weaker than expected results was mainly due to higher than expected operating expenses from Postal Services and International segments. No dividend was declared.

QoQ. 2QFY19 performance reversed into a core net loss of RM17.3m (from core earnings of RM4.2m) mainly due to higher operating expenses from Postal Services, International and Others segments but slightly cushioned by improved margins from the Courier and Logistics segments.

YoY. 2QFY19 performance reversed into a core net loss from core earnings of RM5.6m mainly due to higher operating expenses from Postal Services, Courier and International segments but slightly cushioned by improved margins from Others segment.

YTD. 1HFY19 performance reversed into a core net loss of RM13.1m (from core earnings of RM44.2m) mainly due to higher operating expenses from Postal Services, Courier and International segments.

Sudden rise in operating expenses. We note that the main reason for the disappointing results this quarter was due to the significant rise in operating expenses in both the Postal Services and International segments. Management did not pinpoint any specific reasons towards the increase as of now, but we believe it will be highly unlikely for Pos to turnaround on its operational efficiency in the near-term due to its high fixed cost structure.

Outlook. We are turning negative on the near-term outlook of Pos and expect the weak results to continue throughout the financial year. 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 adjust our forecast to FY19: -RM34.9m, FY20: RM7.1m and FY21: RM34.3m (from RM39.5m, RM50.6m and RM55.6m respectively) as we adjust for lower margins moving forward from the Postal Services and International segments amidst intense pricing competition.

Maintain SELL, lower TP: RM2.55 (from RM3.03 previously) pegged to a 1.06x PB Multiple which is a 20% discount on Singapore Post’s FY19 P/B multiple to reflect the revision in our earnings forecasts amidst the challenging operating environment. Any improvements 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 - 22 Nov 2018