Pos’ 2020 plan includes initiatives that will eventually help in improving operational efficiency and thus, cost saving of about c.RM15m this year. The new tariff rate has been implemented since 1 Feb 2020 and management clarified for potential incremental revenue of c.RM120-180m/year. Management is confident of Pos breaking even in FY20. We have now cut our FY20-FY21 earnings to RM3.6m and RM22.8m (from RM77.3m in FY20 and RM115.4m in FY21) after mellowing the potential tariff hike impact and imputing higher staff cost. Maintain HOLD, with a lower TP: RM1.06 (from TP: RM1.55). While the recent tariff hike should aid Pos’ turnaround, challenges remain from the risk of margin compression in their courier segment due to stiff competition coupled with impact from Covid-19.

We Attended Pos’ Investor’s Briefing With the Following Key Takeaways:

Tariff rebalancing. The new tariff rate has been implemented since 1 Feb 2020 and is necessary to improve postal services sustainability. Management clarified that the potential conservative upside will be c.RM10m-15m incremental monthly revenue (c.RM120-180m a year) assuming a 26% drop in mail volume. However, Feb volume only showed a 6% drop; hence there is potential for volume downside to be less profound than initially thought to be. In light of that, management is confident of Pos breaking even in FY20.

Postal services. Pos aims for retail transformation in their postal services segment by further monetisation of post offices and elevating customer experience. This transformation includes: (i) rationalising post offices by relocating, right-sizing or closuring of post offices and transforming them into e-Commerce fulfilment centres; (ii) focusing on financial services such as selling premium insurance and microfinancing; (iii) improving operating efficiency by streamlining systems and using cashless payment for faster services; and (iv) potential equity divestment in Pos Ar Rahnu (valued at about RM200m).

Courier. The transformation plan for courier include: (i) enhancement of mobile apps to improve customer service and experience; (ii) expansion of touchpoints through partners; and (iii) entrepreneurship program and c rowdsourcing of about 1000 riders to lower fixed cost. Management guided that these initiatives will eventually help in improving Pos’ operational efficiency and thus cost saving for about RM15m this year. Moreover, in FY20, Pos is eyeing at adding another 20 distribution centres with semi auto sorting machines, 6 fully auto sorting machine (which 5 of them have already been installed), and 1 mini integrated parcel centre. As of now, Pos has a combined capacity of IPC1 & IPC2 at 530k parcels/day and their utilisation is about 300k/day. Pos is looking at increasing it to 400k/day.

Logistics and aviation. For logistics segment, Pos is looking at rationalizing of non performing business and improving asset utilisation. For aviation, Pos is forming strategic alliances with SIA Engineering to boost their aviation competitiveness.

Outlook. We expect better showing in FY20 for Pos given the postage hike. Although management sounds very promising in their transformation journey, we believe that all these initiatives will go through a gestation period before contributing positively in the longer term. Still, Pos’ near term outlook 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. For courier segment, although being the largest courier services company in Malaysia, we still expect the weak results to persist in the near term due to stiff competition, coupled with impact from the Covid-19 outbreak which would impact e-commerce transactions (i.e. online shopping).

Forecast. After factoring in management’s revised guidance on the potential tariff hike impact (previous guidance was higher) and imputing higher unionised staff cost (potential increase following the tariff hike), we cut FY20-FY21 earnings to RM3.6m and RM22.8m (from RM77.3m in FY20 and RM115.4m in FY21).

Maintain HOLD, with a lower TP: RM1.06 (from TP: RM1.55) based on 0.5x (from 0.7x) FY12/20 BVPS of RM2.11 (at -1.25 S.D. below its 3-year historical P/B average of 1.46x) to account for lower earnings contribution and Covid-19 outbreak.

Source: Hong Leong Investment Bank Research - 5 Mar 2020