Period   1Q14

Actual vs. Expectations  The 1Q14 net profit of RM43.7m came in within expectations, at 25% of our and consensus full-year forecasts.  

Dividends   No dividend was declared during the quarter. 

Key Results Highlights   YoY, its various 1Q14 revenue segments rose across the board led by mail (+11.7%);  courier (+24.6%) and retail (+4.1%) and others (+24.6%). (refer to summary results table for further details).

YoY,  1Q14 operating profit rose 36.3% to RM57.7m despite a 10.8% increase in operating expenses due to annual salary increment, higher air transportation costs on more expensive jet fuel price, higher raw materials and consumables and higher rental, communication and utilities. Offsetting the higher operating costs, the solid operating profit growth was led by: (i) courier (+61%) due to higher on-demand customers revenue (+25%), contract customers (+13%) and prepaid box (>100.0%) mainly as a result of higher online business transactions and extended service counter hours at certain PosLaju centers in Klang Valley; and (ii) other segments (+70%) due to higher revenue generated from LHDN E-filling as well as higher contributions from printing and insertions business. 

Outlook   POS is looking to grow its profitable courier and logistics segment through leveraging on its numerous Pos Laju centres as well as extract further synergies from Kuala Lumpur Airport Services (KLAS), a wholly-owned subsidiary of DRB-Hicom and POSM to create an efficient workflow of logistic management services.

The group is also strengthening its retail segment, making it a one-stop solution centre, especially with the growth of its Islamic pawn-broking (Ar-Rahnu) business.

Looking ahead, Pos Malaysia is staying on course in implementing and delivering its 5-year Strategic Plan initiated in 2012 and is now into its second phase to create an efficient and effective foundation that will provide Pos Malaysia with both the strength and stability to support revenue diversification, in line with best practices of other successful postal organisations.

Meanwhile, a special dividend seems possible given its current remaining Section 108 tax credit of RM177m or 33 sen/POS Malaysia share (tax credit expiring end-2013; after deducting the proposed final net dividend of 7.1 sen).

Nevertheless, do not get hopes up too high as: (i) POS Malaysia requires an estimated capital of RM500m as working capital for its AL-Rahnu Islamic pawn broking business; and (ii) its planned estimated capex in FY Mar 14 of RM330m exceeds FY14 operating cash-flow of RM290m. 

Change to Forecasts No changes to our forecasts. 

Rating   We are changing our DCF-based target price from RM4.90 to RM5.39 based on 15x CY14 EPS of 35.9 sen in line with its peers’ average. YTD, the stock has risen 51% and exceeded our previous target price. Based on last traded price of RM5.39, the stock offers only a potential total return of 5.6%. Correspondingly we downgrade our Outperform call to Market Perform.

Risks  Delays in execution of its business transformation plan.

Source: Kenanga