TMP Phase 1 a success story. We regard POSM's Transformation Master Plan Phase 1 as a success story. Its delivery beats and route optimization have improved and given rise to a 280bps y-o-y expansion in the company's PAT margins for FY11 on an annualized basis. The new National Mail Processing Centre in Shah Alam, which commenced in Nov 2011, has also benefited the group in terms of substantial cost savings through: (i) a higher level of automation, up from 10% to >60%, (ii) improvement in delivery standards from <75% in FY09 to 90% to date (i.e. 90% of mail is sent on time), and (iii) elimination of manual work through the redeployment of 200 staff members to other divisions such as the courier segment, which is growing healthily. Given the positive outcome, management intends to consolidate the existing 28 Mail Processing Centres (MPC) to 7-8 MPCs by FY13-15, according to the 2nd Phase of its 5-year TMP (2013-2017). Judging from the achievements so far, we expect POSM's margins to expand moving forward.

Not giving up on FLC land. We note that DRB-HICOM did not succeed in its request for the Federal Land Commissioner (FLC) to relax the provisions of the Postal Land Act in respect of 16 plots of strategic land it identified on 25 April 2011 to allow for their commercial use in addition to the provision of postal services. As such, the group will get a refund of the RM17.3m it paid to Khazanah. Nonetheless, management will continue to submit proposals to the FLC in hope of getting the Government's approval. In the meantime, we continue to believe DRB-HICOM will eventually unlock the value of the 5 land plots owned by POSM through sale or redevelopment. We understand that management has to date received multiple proposals for these parcels of land from various parties. These developments back our view of a strong possibility of DRB-HICOM unlocking the value of the land. Meanwhile, management affirmed that there are plans on its table for these plots of land, especially for the most sizeable and valuable piece in Brickfields. As such, we continue to include the value of these 5 plots in our SOP valuation.

Is a dividend in the works? We expect POSM to announce a dividend for FY12 soon. In view of the strong results achieved in FY12, with annualized Revenue, PBT and Net Profit higher by 17%, 62% and 66% respectively, and considering its huge cash pile of RM410m as at Mar 2012 and zero gearing, we are upgrading our NDPS from 11 sen to 18 sen based on a payout ratio of 65%. This translates into a lucrative dividend yield of 6.8%.

Bright prospects. BUY. We continue to like the postal group despite the organic decline in mail volume. This is based on: (i) the high possibility of DRB-HICOM eventually unlocking the value of 5 land plots, (ii) expectations of a bigger contribution from PosLaju to group earnings by leveraging on 1 of the 2 license holders in Malaysia providing ground handling services to foreign airlines, namely DRB's Kuala Lumpur Airport Service (KLAS), to further enhance its already lucrative courier business, which contributed 21% of revenue in FY12, and (iii) POSM's potential tie-up with Bank Muamalat and Uni-Asia Life Insurance, which will boost the retail segment by way of high margin fees for OTC transactions at Pos, apart from the existing SBS provided on behalf of RHB and Maybank. Management also hinted that the potential revenue contribution from DRB-HICOM to POSM should range from RM250m-RM500m, with the bulk coming from the former's automotive business. Nonetheless, we maintain our earnings forecast at this juncture and FV of RM4.14, based on SOP valuation, This incorporates the value of PSOM's 5 land plots, a 10x PER on FY12 earnings and the group's cash holdings. Maintain BUY.

Source: OSK