Period  1Q15

Actual vs. Expectations  1Q15 net profit of RM27m (-48% YoY) came in below expectations, at 16% and 15% of our and consensus full-year forecasts. The negative variance from our forecast is due to higher-thanexpected operating cost and a higher effective tax rate.

Dividends  No dividend was declared during the quarter.

Key Result Highlights YoY, 1Q15 revenue rose 3.6% driven by courier (+23%) and retail (+9.6%) which more than offset lower mail (-3.9%). Overall revenue rose despite the higher base effect in 1Q14 from the mail segment, boosted by the one-off General Election 2013, while the Group’s initiatives especially in the courier segment via innovative customer-centric solutions are yielding positive outcome. Operating expenses rose by RM37.2m or 12% YoY primarily due to staff and transportation costs; transportation cost primarily involving higher international volume in line with the Group’s focus in capitalizing the global trend of cross border e-commerce merchandise transactions.

 Correspondingly, operating profit fell 49% to RM33.5m due to fixed mail segment’s operating cost despite the reduction in revenue as compared to 1Q14 cyclical high from the volume contributed by the General Election 2013. This brings 1Q15 net profit lower by 48% to RM27.1m which was further exacerbated by a higher effective tax rate of 50% compared to 33% in 1Q14.

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 wholly-owned subsidiary of DRB-Hicom and Pos Malaysia, to provide 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 to 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 We are downgrading our FY15E and FY16E net profits by 4% and 3%, respectively, taking into account the higher operating costs.

Rating & Valuation Correspondingly, our target price is reduced from RM4.75 to RM4.61 based on unchanged 15x CY15 revised EPS of 30.7 sen. Downgrade to Underperform.

Risks  Delays in execution of its business transformation plan.

Source: Kenanga