Pos announced that it will divest 49% equity interest in Pos Aviation Engineering Services (PAES) to SIA Engineering Company Limited (SIAEC) for for an indicative cash consideration of RM10.1m. The proposed divestment will facilitate the entry of SIAEC as PAES’s strategic partner and allow the latter to expand its customer base. We believe this is a good gesture for Pos to garner more clients for PAES and may be a turnaround for PAES after registering loss of RM1.7m for FYE03/19. However, we reckon that this will only be a marginal gain for Pos. Maintain HOLD with unchanged TP of RM1.55 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 announced that it has entered into a Share Purchase Agreement and a Shareholders Agreement with SIA Engineering Company Limited (SIAEC), in relation to the proposed divestment of 49% equity interest in Pos Aviation Engineering Services (PAES) to SIAEC. Pos shall transfer 7.8m ordinary shares representing 49% equity interest in PAES to SIAEC, for an indicative cash consideration of RM10.1m. The indicative disposal consideration was arrived at on a willing buy-willing seller basis and after taking into consideration the unaudited net assets of PAES as at 31 July 2019 of approximately RM20.6m, which includes the market value of PAES’s property, plant and equipment as at 1 October 2019 of RM12.3m as appraised by an independent valuer.

Notably, SIAEC is a major provider of aircraft maintenance, repair and overhaul services in Asia-Pacific. SIAEC has a client base of more than 80 international carriers and aerospace equipment manufacturers. It provides line maintenance services at 36 airports in 8 countries, as well as airframe and component services on some of the most advanced and widely used commercial aircraft in the world.

HLIB’s VIEW

Neutral on the news. The proposed divestment will facilitate the entry of SIAEC as PAES’s strategic partner and allow the latter to expand its customer base, enhancing its technical expertise, expanding its product offerings and diversifying into new lines of MRO, and tapping into new markets and distribution networks. We believe this is a good move for Pos to garner more clients for PAES and may be a turnaround for PAES after registering loss of RM1.7m for FYE 03/19. However, we reckon that this will only be a marginal gain for Pos. Upon completion of divestment, Pos and SIAEC will hold 51% and 49% equity interest in PAES respectively and it will become a jointly-controlled entity of Pos.

Forecast. Unchanged given the insignificant near term impact from the divestment.

Maintain HOLD with an unchanged TP of RM1.55 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 will persist.

Source: Hong Leong Investment Bank Research - 14 Feb 2020