Period  2Q14/1H14

Actual vs. Expectations The 1H14 net profit of RM84m (+26% YoY) came in within expectations, at 48% of our and consensus full-year forecasts.

Dividends  A first interim gross dividend of 8.0 sen was declared which will go ex on 9 Dec 2013.

Key Results Highlights QoQ, 2Q14 revenue fell across the board, led by mail (-14%); retail (-2%) and others (-54%) which more than offset a small improvement from courier (+2%) (refer to summary results table for further details). Overall revenue fell 11% mainly due to lower traditional mail services, lower contribution from LHDN E-filing and lower commissions from agencies in the retail segment. Correspondingly, QoQ, 2Q14 operating profit fell 14% on the back of lower turnover.

 YoY, 1H14’s revenues from three segments rose as follows; mail (+5%); courier (+23%) and others (+26%) which more than offset lower contribution from retail (-22%). (refer to summary results table for further details). 1H14 operating profit rose 34% to RM108m due to higher revenue despite increase in expenses. Operating expenses increased by 6.3% due to increase in staff costs as a result of annual salary increment and higher overall costs for the following; transportation cost for air transport due to higher jet fuel consumption, raw materials and consumables, repair and maintenance due to higher consumption of mail consumables and rental, communication and utilities on rental of office and warehouse and computer equipment cushioned by lower depreciation and amortization charges on computer equipment and other operating expenses on marketing and advertising.

Outlook  POS is looking to grow its profitable courier and logistics segment through leveraging on its numerous Pos Laju centres as well as extracting further synergies from Kuala Lumpur Airport Services (KLAS), a wholly-owned subsidiary of DRBHicom 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 five-year Strategic Plan initiated in 2012 currently into its second phase, to create an efficient and effective foundation that will provide 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 the 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, we are not getting our hopes too high as: (i) POS 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’s operating cash-flow of RM290m.

Rating No changes to our forecasts. Maintain Market Perform and a target price of RM5.39 based on 15x CY14 EPS of 35.9 sen in line with its peers’ average.

Risks to Our Call  Delays in execution of its business transformation plan.

Source: Kenanga