Pos’s 4Q19 core net loss of RM98.6m, brought FY19 core net loss to RM125.4m. The results were below ours and consensus forecasts mainly dragged a combination of (i) lower group revenue (drop in sales volume with the exception on Courier segment) and (ii) increase operating cost (high fix cost structure). Pos also recognised RM39.6m impairment loss on goodwill during 4Q19. This loss of goodwill in logistics segment was a result of performance that is below expectations due to competitive market conditions. We believe that management has made certain accounting adjustments in 4Q19 results (kitchen sinking exercise). Going forward, we still expect Pos to remain 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. Post-model update, we now expect net losses of RM27.4m for FY20 and meagre net profit of RM2.9m for FY21 (from profit RM2.6m and RM28.9m in FY20 and FY21 respectively). Maintain SELL, with a lower TP: RM1.36 (from RM1.90 previously) pegged to a 0.6x PB multiple. We value Pos at a 40% discount to its BV in view of continued losses in the near term coupled with a persistent challenging operating environment.

Below expectations. 4Q19 core net loss of RM98.6m, brought FY19 core net loss to RM125.4m which was below ours and consensus forecasts. The weaker than expected results were mainly due to lower revenue registered from logistics segments (drop in project logistics for RAPID Pengerang), postal services (decline in traditional mail volume largely due to electronic substitution) and international segments (loss in one major customer account). We believe that Pos has made certain accounting adjustments during the 4Q19 results which amongst others, comprises kitchen sinking exercise (i.e. impairments on goodwill) amounting to RM39.6m. No dividends were declared.

QoQ. 4Q19 revenue remained relatively flat (+2.3%) at RM594.7m (from RM581.2m). However, core net loss deteriorated to RM98.6m (from RM13.6m) mainly due to increase in cost of sales and operating expenses (+6.2%), lower other income contribution (-58.4%) and higher other expenses (+10.1%). The lower other income contribution was due to lower net foreign exchange gain. Furthermore, courier segment is now making loss of RM70.1m in 4Q19 (from profit RM21.7m in 3Q19). Management has yet to clarify on the reasoning behind the increase in other expenses that caused the operational loss in 4Q19.

YoY. 4Q19’s revenue declined (-8.9%) to RM594.7m (from RM653.1m) and net loss of RM98.6m vs profit of RM19.3m in 4Q18. The core net loss was mainly due to lower contribution from logistics (-169.2%), postal services (-24%) and courier segments (- 353.7%).

YTD. FY19 core net loss of RM125.4m was mainly due to decline in contribution from courier and international segment, as witnessed by the drop in reported EBITDA of - 84.2% and -203.1% respectively, largely attributed to higher cost of sales and operating expenses from these segments. Additionally, other expenses have surged to RM76.8m (from RM32.4m) due to impairment loss on goodwill and impairment loss of property, plant and equipment. This loss of goodwill from logistics segment was a result of performance that is below expectations due to competitive market conditions. There could be further downside risks of goodwill impairments if the Aviation segment struggles (Pos acquired KLAS and Konsortium Logistik Bhd in 2016).

Outlook. Pos’s outlook going forward remains generally challenging due to continuing contraction in conventional mail volume as business enterprises are increasingly communicating with their customers via electronic and digital channels, foregoing  mail-based communications. We expect postal services’ losses to continue widening moving forward given Pos’s inability to fully reduce the number of post offices and rationalize its workforce. For courier segment, although being the largest courier services company in Malaysia, we still expect the weak results to continue moving forward due to stiff competition.

Forecast. Post-model update, we now expect net losses of RM27.4m for FY20 and meagre net profit of RM2.9m for FY21 (from profit RM2.6m and RM28.9m in FY20 and FY21 respectively) after factoring for lower growth rate assumption for postal services and international segment and lower margins moving forward from courier segment amidst intense pricing competition as well as lower contributions from the others segment.

Maintain SELL, with a lower TP: RM1.36 (from RM1.90 previously) pegged to a 0.6x PB multiple. We value Pos at a 40% discount to its BV in view of continued losses in the near term coupled with a persistent 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 - 23 May 2019