Pos reported core net loss of RM28.0m in 2QFY12/19 which brought down 1HFY12/19 to loss of RM37.6m. The results were both below our expectation and consensus. The weaker than expected results was mainly due to weaker than expected contributions from postal services, courier, aviation and other segment. Following the weaker results, we now expect RM54.5m loss for 9M period of FY12/19 and loss of RM25.4m in FY20, before turnaround profit of RM17m in FY21. Maintain SELL with a lower TP of RM1.25 (from RM1.29) based on 0.6x FY12/20 BVPS of RM2.09

Below expectations. Reported core net loss of RM28.0m in 2QFY12/19 which brought down 1HFY12/19 to loss of RM37.6m, as compared to HLIB’s forecasted FY12/19 loss of RM33.1m, and below consensus estimate for a loss of RM42.5m. The results shortfall was mainly due to weaker than expected contributions from postal services, courier, aviation and other segment. Note that Pos changed its FYE from Mar to Dec, making this year (i.e. FY12/19) a 9M financial year.

QoQ. Revenue dropped by 4.0% to RM550m (from RM573m) due to seasonally weaker quarter from: (i) courier services segment (-10.9%) due to lower volume from walk in customer; (ii) aviation segment (-29.1%) contributed by lower tonnage of cargo handled; and (iii) others segment (-38.1%) mainly due to lower revenue from printing and digital services. As a result, core net loss widened to RM28.0m (from RM9.7m) on lower EBIT contribution from these segments.

YoY/YTD. Core losses widened YoY to RM28.0m (from RM17.3m in 2QFY19) and YTD to RM37.6m (from RM13.1m in 1HFY19) dragged mainly by lower margin of courier and aviation segments as well as the negative impact from MFRS 16 accounting (estimated RM3-4m in 1HFY12/19).

Outlook. We remain cautious on the near-term outlook of Pos as we believe it will continue to be dragged by the contraction in mail volume, high fixed cost structure, Universal Service Obligation (USO) costs and stiff competition in their courier division against a backdrop of the e-commerce boom. Although management is confident that stamp tariff hike will be happening in early FY20, we reckon it may further trigger deterioration in postal services volume, providing only a short term reprieve.

Forecast. Following the weaker results, we now expect RM54.5m loss for 9M period of FY12/19 and loss of RM25.4m in FY20, before turnaround profit of RM17m in FY21.

Maintain SELL with a lower TP of RM1.25 (from RM1.29) based on 0.6x FY12/20 BVPS of RM2.09 (at -1.5 S.D. below its 3-year historical P/B of 1.46x) as we rolled forward our valuation to FY20 (lower BVPS due to losses). Notably, this is below its peer’s (Singapore Post) 3-years average of 1.9x. The discount is fair in view of its 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. Upside risks to our call include short term positive sentiment should the tariff hike play out in 1HFY20.

Source: Hong Leong Investment Bank Research - 26 Nov 2019