Period

1Q16

Actual vs. Expectations

1Q16 net profit of RM22.7m (-16% YoY) came in below expectations at 17% and 16% of our and consensus full-year net profit forecasts, respectively. The negative variance from ours was due to higherthan- expected operating expenses.

Dividends

No dividend was declared during the quarter. Key Result

Highlights

QoQ, 1Q16 operating profit rose 10% due to higher revenue generated from sales of digital certificate and retail segment’s operating losses narrowing to RM15.8m as compared to RM17.6m in 4Q15 due to lower operating cost from Ar Rahnu operation. This nudged 1Q16 net profit higher QoQ by 14%.

YoY, 1Q16 revenue rose 5.8% driven mainly by courier (+20% YoY) and the transhipment business from the mail segment (+1.2% YoY). Operating expenses rose by 8% YoY primarily due to staff and transportation costs. Staff cost increase corresponded with the overall increase in revenue. The other significant increase is from transportation cost primarily involving higher international volume in line with the Group’s focus in capitalising the global trend of cross border e-commerce merchandise transactions. This brings 1Q16 net profit to RM22.7m (-16% YoY).

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 efficient 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 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 downgrade our FY16E net profit by 6% due to the poor set of results to take into account higher operating expenses and lower volume growth.

Rating & Valuation

Correspondingly, we downgrade our TP from RM4.11 to RM3.66 based on 16x FY16E EPS sen. (+1.0 SD above historical mean). Reiterate Underperform.

Risks

Delays in execution of its business transformation plan.

Source: Kenanga Research - 25 Aug 2015