The overall parcel volume handled by the industry has shrunk by 30% post pandemic, attributed to a shift in consumer purchasing trend as well as waning consumer sentiment. E-commerce players increasingly insourcing their logistics operations have also led to decline in PosM’s parcel volume, as evident in the recent quarters. To mitigate this impact, the Group will be focusing on (i) improving overall parcel yield by altering customer mix, (ii) lowering transportation costs, as well as (iii) engaging with regulators to impose floor pricing and check mechanisms to monitor delivery masking. While PosM has managed to achieve breakeven in 2Q22, we prefer to err on the side of caution and maintain our HOLD call on PosM, as we reckon the intense competition in the last mile delivery space could potentially weigh down on its profitability. Our TP is also unchanged at RM0.61, based on a P/B multiple of 0.65x on FY23f BVPS of RM0.94 (at -1SD below its 3Y mean of 1.17x).

Strategies to tackle the shrinking pie. As we emerge from the pandemic, the overall parcel volume handled by the market collectively has shrunk by c.30%, owing to (i) consumer purchasing trend shifting from online to physical stores, and (ii) waning consumer sentiment. E-commerce players are increasingly insourcing their fulfilment operations, which also has a negative impact to PosM’s parcel volumes. To mitigate this, PosM is working on improving its overall parcel yield, by altering its customer mix to focus on customers that are more service-oriented, rather than cost oriented, as its existing customer mix is skewed towards the lower yield segment. We understand that the parcel yield has improved by more than 5% thus far, falling slightly below its initial target to improve by 7%. On a separate note, PosM’s ability to win back customers that have previously turned away is a testament to its improving service quality, in our view. That said, management has indicated that 3Q parcel volumes have remained rather depressed so far, but is also seeing early signs of volumes recovering.

Costs under control. One of PosM’s key focus in 2H22 is to reduce its transportation cost by 20%, via productivity improvements as well as effort to merge both its Mail and Courier network. The Group is also not anticipating any significant cost increase, specifically in manpower costs despite the implementation of higher minimum wage, given that majority of its staff are earning above the current minimum wage of RM1,500. The potential parcel volume growth is also unlikely to drive costs higher, as PosM has sufficient capacity and capabilities to handle the parcel volumes, without having to increase headcounts.

Working with regulators. In order to create a more level playing field for all courier service providers, we note that PosM and other industry players are working with the regulators, in hope to impose a floor-pricing for the price per parcel, to weed out competitors that have been undercutting to gain market share. Separately, regulators are also looking to introduce some check mechanisms to monitor delivery masking – whereby e-commerce platforms dictate the courier service provider of choice, instead of the shipper or buyer.

Forecasts. Remain Unchanged.

Maintain HOLD, TP: RM0.61. Despite PosM achieving breakeven in 2Q22 and is seeing early signs of volumes recovery, we prefer to err on the side of caution and maintain our HOLD recommendation on PosM, as we reckon that the intense competition in the last mile delivery space could continue to weigh down the Group’s profitability. Our TP is also unchanged at RM0.61, implying a P/B multiple of 0.65x on FY23f BVPS of RM0.94 (at -1SD below its 3Y mean of 1.17x).

Source: Hong Leong Investment Bank Research - 5 Sept 2022