Divestment of World Cargo Airline

PosM announced that it will divest 51% equity interest in World Cargo Airline (WCA) to Asia Cargo Network (ACN), for a cash consideration of RM40m. Since WCA is a non-core business to PosM, the proposed divestment will allow WCA to be managed more effectively with improved reliability and service performance by ACN, while PosM can be more focused on its core businesses. While no immediate material financial benefits can be expected, we believe this exercise will present stronger value in the longer term. Maintain BUY with unchanged TP of RM1.20, based on 0.65x of FY20 BPVS.

NEWSBREAK

PosM announced that it has entered into a Share Subscription Agreement and a Shareholders Agreement with Asia Cargo Network (ACN), in relation to the proposed divestment of 51% equity interest in World Cargo Airline (WCA). WCA will issue new 15.6m ordinary shares (representing 51% equity interest in the enlarged capital) to ACN, for a cash consideration of RM40m and PosM will dispose 106.8k preference shares (51% stake) in WCA to ACN. For the 9-month financial period ended 31 Dec 2019, WCA’s audited revenue was approximately RM83m while its loss after taxation was approximately RM32m. Its audited net liabilities as at 31 Dec 2019 were RM66.4m.

The proceeds from the new share issuance will be used by WCA to settle intercompany debts owed to Pos Aviation and PosM amounting to RM37.8m.

Notably, WCA was incorporated as Gading Sari Aviation Services (GSAS), providing services primarily for PosM for the movement of postal and courier products to Sabah & Sarawak. Meanwhile, ACN is engaged in all kinds of carriage and conveyance by air and other modes. ACN is also involved in aircraft leasing, charter airfreight, freighter aircraft and aviation consultant with an issued and paid-up share capital of RM15m.

HLIB’s VIEW

Able to utilize ACN’s expertise. Since WCA is a non-core company for PosM, the proposed divestment would allow ACN, who is experienced in the aviation industry, to manage WCA more efficiently with improved reliability and service efficiency. We expect PosM to leverage on ACN’s experience and network to provide more value to their customers, while concentrating more resources in their core businesses consisting of postal, courier and retail services.

No immediate impact for now. While the immediate financial benefit is relatively immaterial, we believe this restructuring exercise will present stronger value in the longer term.

Forecast. Unchanged given the insignificant near term impact from the divestment. On proforma basis, net gearing will reduce from 33% (1QFY20) to 30%.

Maintain BUY, with an unchanged TP: RM1.20, based on a P/B multiple of 0.65x 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 - 21 Aug 2020