Period  3Q14/9M14

Actual vs. Expectations 9M14 net profit of RM107m (-10% YoY) came in below expectations, at 62% of our and consensus full-year forecasts. The negative variance from our forecast is due to higher-than-expected operating cost.

Dividends  No dividend was declared during the quarter.

Key Results Highlights QoQ, 3Q14 revenue rose marginally by 4% led largely by courier (12%) and others (+33%) which more than offset the decline in traditional mail services (-0.6%) (refer to summary results table below for further details). However, QoQ, 3Q14 operating profit fell more than turnover growth due to higher-than expected operating expenses emanating from the increase in staff costs on higher staff headcount, steeper transportation charges for air transport due to increased jet fuel consumption, higher expenses for repair and maintenance, rental, communication and utilities on warehouses and computer equipments. The higher effective tax rate further exacerbated 3Q14 net profit to RM22.8m (-43% QoQ).

 YoY, 9M14 revenue rose 8% driven by mail (+4%); courier (+18%) which more than offset lower contribution from retail (-8%) and others (-7%). (refer to summary results table below for further details). 9M14 operating profit rose 17% to RM137m on the back of higher revenue despite an increase in expenses, which increased by 7.2% as explained above. The increase was mitigated by lower depreciation and amortization charges and other operating expenses in marketing and advertising. However, the higher-than-expected operating expenses and higher effective tax rate dragged down overall 9M14 net profit lower by 10% to RM107m.

Outlook  Pos Malaysia is looking to grow its profitable courier and logistics segment by leveraging on its wide Pos Laju network as well as extracting further synergies from Kuala Lumpur Airport Services (KLAS), a whollyowned subsidiary of DRB-Hicom and Pos Malaysia to create an efficient logistic management service.

 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 implementing and delivering its five-year Strategic Plan initiated in 2012. Currently into its second phase, the plan is 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.

Change to Forecasts

 Due to the poor set of results, we are downgrading our FY14E and FY15E net profits by 5% taking into account the higher operating costs.

Rating Correspondingly, our target price is reduced from RM5.39 to RM5.13 based on unchanged 15x CY14 revised EPS of 34.2 sen in line with its peers’ average. Maintain Market Perform.

Risks  Delays in execution of its business transformation plan.

Source: Kenanga