Digitalisation and improving operational efficiency remains the key focus for Pos this year. Pos is looking to establish a parallel new business in targeting SMEs by offering integrated SMEs solution through partnerships. Furthermore, Pos is also reorganizing their operation by consolidating all group transport activities under Pos ACE and realignment of state operations. Management has clarified that the core loss of RM125.4m in FY19 was due to one-off aircrafts redelivery costs, terminal dues increase, salary adjustment (due to collective agreement) and lower group revenue contribution. Forecast unchanged as we believe that all these initiatives will go through gestation period before contributing positively in the longer term. Upgrade to HOLD as share price has fallen to now match our TP of RM1.36 (0.6x P/B).

Digitalisation. Pos is continuously investing into digitalization in transforming itself to become a more robust platform for customers. It is also establishing a parallel new business in targeting SMEs by offering integrated SME solutions through partnerships. This includes: (i) e-commerce partnership that provide e-commerce store, digital marketing & social media sharing to SME; (ii) payment gateway partnership that have potential to develop tailored SME solutions with right partner; and (iii) Pos Logistics which focuses on the provision of building efficient first-mile solution to SMEs. Pos will be the common aggregator for this logistics platform and offers product spectrum of Pos Laju delivery, same day delivery, cash on delivery and time certain delivery. Management has guided a yearly capex of RM200m, of which, RM100m will be spent on digitalization specifically on track and trace app.

Improving operational efficiency. Pos plans to reorganize their operation to improve customer’s experience by: (i) consolidating all group transport activities under Pos ACE to have a better end-to-end capacity planning including management of fleet, typically line haulage and aircraft scheduling and allowing for more items to be processed efficiently; and (ii) realignment of state operation that focuses on improving customer service and customer experience.

IPC2. Integrated Processing Centre at KLIA (IPC2) has been completed with a capacity 230k parcels/day. As of now, Pos has a combined capacity of IPC1 & IPC2 at 530k parcels/day and an aggregate capacity (including all Pusat Pos Laju nationwide) will be at 800k parcels/day during peak.

Financials. Management has clarified that the core loss of RM125.4m in FY19 was due to: (i) one-off aircrafts redelivery costs of RM63m, recognized under courier segment as Pos realized that they have under provided the maintenance charges previously; (ii) terminal dues increment due to UPU’s full target systems that increases3-8% every year in international segment; (iii) RM31m salary adjustment due to collective agreement that cause increase in workforce salary every 3 years for about 4-5% in postal and courier segments; and (iv) lower revenue registered from postal services, logistics and international segments.

Tariff hike soon? Pos is confident that tariff hike will be happening in FY20. Pos mentioned that they are working with the regulator and government for an overall tariff rebalancing to update the tariff that was last adjusted in 2010. This tariff hike will eventually increase their earnings and management reckons that they are able to achieve breakeven in FY20. Without this tariff hike, postal services segment will continue making losses. However, we opine that even with the tariff hike, postal services may still continue making losses due to continuing decline in their mail volume coupled with their high costs to serve the Universal Service Obligation (USO).

Outlook. Management feels confident on the outlook of both aviation and logistics

segments as ecommerce will continue to drive the growth in freight transportation. However, we remain neutral for this outlook as we note that the industry landscape remains competitive and challenging. Outlook for courier over the next few years may sound very promising against the backdrop of ecommerce boom, however, we believe that Pos is facing intense competition from other players and Pos may lose their market capture. Meanwhile, postal services’ outlook remains challenging due to continuing contraction in conventional mail volume as business enterprises are increasingly communicating their customers via electronic and digital channels.

Forecast. Unchanged as we believe that all these initiatives will go through gestation period before contributing positively in longer term and pending the outcome of tariff hike at this juncture (we have not factored this in as we reckon the situation remains fluid).

RM1.36 TP unchanged but upgrade to HOLD. Our RM1.36 TP (pegged to 0.6x P/B) is unchanged. However, as share price has fallen -39% since late Feb and now matches our TP, we are inclined to upgrade our rating from Sell to HOLD. While near term losses and a persistent challenging operating environment are key risks, we feel this is balanced by the possibility of a tariff hike.

Source: Hong Leong Investment Bank Research - 30 May 2019