Pos Malaysia has announced the increase in postage hike to RM1.30 from RM0.60 per standard 20g mail effective on 1 Feb 2020. We are positive on the news of the postage hike in the near team, as Pos is able to generate additional estimated revenue of c.RM250m on a full year basis (c.RM230m for FY20). Following the news, we now expect profit of RM77.3m on FY20 earnings from a loss of -RM25.4m as we take into account higher revenue generated from postal services in tandem with higher cost possibility. Upgrade to HOLD (from Sell) with a higher TP of RM1.55 (from RM1.25) based on 0.7x FY12/20 BVPS of RM2.22 (at -1.25 S.D. below its 3-year historical P/B of 1.46x).

NEWSBREAK

Pos Malaysia has revised its postage rates following the approval by the government. The new rate is at RM1.30 from RM0.60 per standard 20g mail effective 1 February 2020. The last postage rate revision was in 2010. Noted that this new revised rate only applies to commercial entities (representing about c.95% of all mail users in Malaysia) and will not affect the rakyat. Besides domestic postage rates, international postal services (parcels less than 2 kg) will increase up to 30%.

HLIB’s VIEW

Positive on the news. We are positive on the news of the postage hike in the near team, as Pos is able to generate additional estimated revenue of c.RM250m (assuming 40% declined in mail volume YoY) on a full year basis. Since the tariff will only be implemented on Feb 2020, we believe the impact on top line should be about c.RM230m (i.e. 11 months impact). However, we remain cautious on the possibility of further deterioration in postal services volume as customers are increasingly communicating via electronic and digital channels, foregoing mail-based communications.

Outlook. We expect better earnings in FY20 for Pos from the contribution of postage hike. However, we remain cautious on the longer term 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.

Forecast. Following the news, we now expect profit of RM77.3m on FY20 from a loss of -RM25.4m and earnings of RM115m (from RM17m) for FY21 as we take into account higher revenue generated from postal services in tandem with higher cost on possibility for increase in wages staff and digitalisation investment.

Upgrade to HOLD (from Sell) with a higher TP of RM1.55 (from RM1.25) based on 0.7x FY12/20 BVPS of RM2.22 (at -1.25 S.D. below its 3-year historical P/B of 1.46x). Notably, this is below its peer’s (Singapore Post) 3-years average of 1.9x. The discount is fair in view of its high fixed cost structure and margin compression in their courier segment due to increase in players in the market; however, this should be balanced by upside of positive sentiment from the impact of a tariff hike. Nonetheless, we reckon that this tariff hike will only be an ephemeral victory at best while the structural issues of declining mail volume and high USO cost will persist. We are comfortable with our hold call due to possible downside risk of unexpected further deteriorating mail volume and the competition in courier segment continues to remain stiff bringing pressure to the margin due to overcrowding of participants (116 courier licence holders as at Jan 2020).

Source: Hong Leong Investment Bank Research - 4 Feb 2020