Period  2Q15/1H15

Actual vs. Expectations 1H15 net profit of RM61m (-27% YoY) came in below expectations, at 37% our, and consensus, fullyear forecasts. The negative variance from our forecast is due to higher-than-expected operating cost.

Dividends  No dividend was declared during the quarter.

Key Result Highlights QoQ, 2Q15 revenue rose only 0.8% driven by courier (+5%) and retail (+49%) which more than offset lower mail (-12%). Overall revenue came in flat due to lower contribution from prepaid and franking segments, which accounted for approximately two-thirds of the total mail volume. However, the slack in mail was more than offset by retail thanks to higher contribution from financial services, especially revenue from the 11.1% growth in insurance commissions, and boosted by the recognition of expired postal order amounting to RM25.5m. This brings 2Q15 net profit to RM34m (+25% QoQ).

 YoY, 1H15 operating expenses rose by 21% YoY primarily due to staff and transportation costs. The higher staff cost was due to strengthening of growth segments such as PosLaju and over-the-counter Financial Services at post offices. The higher transportation cost was due to higher expenses relating to cross border postal charges arising from the growth in trans-shipment business which Pos Malaysia only embarked upon in the latter half of FY14 and increase in air freight charges relating to Universal Service Obligation under The Postal Services Act 2012. This brings 1H15 net profit lower by 27% to RM61m.

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 7% and 3%, respectively, taking into account the higher operating costs.

Rating & Valuation Correspondingly, our target price is reduced from RM4.61 to RM4.44 based on unchanged 15x CY15 revised EPS of 29.6 sen. Maintain Underperform.

Risks  Delays in execution of its business transformation plan.

Source: Kenanga