PosM has seen its courier segment increased tremendously during MCO. Other than that, their international mail business has also recovered as the economy reopens. Management expects the trend to continue throughout 2H as consumer are adapting to the “new normal”. Their logistics and aviation segment has been affected during MCO; however we are expecting a recovery in their logistics segment for 2H in light of better outlook for automotive industry. Their aviation segment may still register losses in 2H as the industry remains challenged by Covid-19. Overall, we have seen some improvement in their business model owing to the tariff hike and improving cost structure. We upgrade the stock to BUY (from Hold) with a higher TP of RM1.20 in anticipation of a recovery ahead.

We organised a meeting with PosM and came away feeling positive. Following are the key takeaways:

Postal segment. PosM saw an increase in their courier demand during MCO. Their normal handling is at 350k parcels/day, while during MCO, the company has received about 600k-700k parcels/day. Post MCO, the company is still seeing high demand in courier service with approximately 400k parcels/day. Management expects the trend to continue throughout 2H with the “new normal” in place (i.e. people are spending less time shopping outside and opt for online shopping instead). In the event of a second wave/ another lockdown, PosM assured that they have enough resources to ride the wave of overwhelmingly high parcel volumes as they are the only player with such high capacity to handle. PosM’s international mail revenue has also recovered as the economy reopens. However, retail and mail revenue saw some drop in Jun 2020. Meanwhile, traditional mail volume drop is manageable and above their expectation; management expected a 26% drop in mail volume triggered by tariff increase. However, the resulted drop was only about 10-15%. Management believes that if this trend continues, they are able to achieve breakeven for their postal services business in 2H.

Logistics segment. Logistics segment saw some decline in their automotive logistics revenue (-47%) and supply chain and marine revenue (-7%) for June 2020 vs Feb 2020. Their operating cost on logistics segment has also seen some decrease by 10% on lower business handled. We expect a recovery for logistics segment in 2H driven by the PENJANA stimulus as positive impact in automotive industry will spill over to PosM’s logistics segment through its haulage business contribution from local automotive production.

Aviation segment. Aviation segment has been severely impacted by the Covid-19 and restricted movement, which saw a plunge in flights handled (-58%) and cargo tonnage handled (-8%) in June 2020 vs Feb 2020. Operating expenses was also lower by 32% on lower business handled in Jun 2020 vs Feb 2020. We believe aviation segment should take longer time to recover as aviation industry remains challenging during this crisis. We are expecting PosM’s aviation segment to register losses in 2H owing to the challenging aviation industry globally.

1Q results recap. During 1Q20, we added back a net +RM22.4m worth of EIs from Pos’s reported net loss of -RM49.2m. Key adjustments were mainly from RM19.5m for net foreign exchange differences and RM2.9m for impairment loss of financial instruments. Management clarified that the RM19.5m of net foreign exchange differences was a result of unrealized loss from the appreciation of USD on their international postal business. On the other hand, the RM2.9m impairment loss was one that had to be recurring realised on quarterly basis. For 2H, management confident That No More Major Impairment Will be Realized.

Other updates. Management shared that headline 2Q results will be better than 1Q with reported losses expected to narrow by half QoQ. However, on a core level, we believe that core loss will be about the same as 1Q as we have excluded RM22.4m worth of EIs. PosM remains conservative and suggested that breakeven may not be possible this year as aviation segment may still drag down their earnings.

Outlook. PosM’s main struggle is their high fixed cost structure. In 1Q, cost of sales decreased 15% QoQ, suggesting that management is in midst of addressing their fixed cost issue. However, in 2Q, we are expecting their cost to increase in tandem with revenue as their business recovers. Management guided that headline breakeven is unlikely this year as the aviation segment may still be hampered by Covid-19. However, we believe we shouldn’t discount the possibility that PosM may achieve breakeven at the core level (after excluding EIs) given contribution from each segments are improving save for aviation.

Forecast. We narrow FY20 losses to -RM13.1m (from losses of -RM41.8m) and higher profit of RM11.1m and RM26.7m in FY21-22 (from profit of RM3.5m in FY21 and RM14.2m profit in FY22) to account for higher contribution from logistics and postal segment.

Upgrade to BUY, with a higher TP: RM1.20 (from RM0.90), based on a higher P/B multiple of 0.65x (from 0.5x) on FY20 BVPS of RM1.84 (at -1SD below its 3-year P/B mean of 1.17x) in anticipation of a recovery ahead. We believe the negatives have been price in for PosM. Furthermore, the recent tariff hike as well as surge in e commerce demand during MCO could contribute to Pos’s earnings coupled with spill over positive effect from the automotive industry to their logistics sectors

Source: Hong Leong Investment Bank Research - 29 Jul 2020