Period

2Q16/1H16

Actual vs. Expectations

1H16 net profit of RM26.2m (-57% YoY) came in below expectations, at 21% and 18% of our and consensus full-year net profit forecasts, respectively. The negative variance from ours was due to higherthan- expected operating expenses. This quarter marked the fifth consecutive quarterly earnings disappointment.

Dividends

No dividend was declared during the quarter. Key Result

Highlights

QoQ, 2Q16 operating expenses rose 8% outpace turnover growth of 2% due to lower mail and courier deliveries. As a result As a result of lower turnover, higher operating expenses and losses at courier, pre-tax profit fell 80% to RM6.6m. This brings 2Q16 net profit to RM3.5m exacerbated by a higher effective tax rate of 47% compared to 32% in 1H15.

YoY, 1H16 revenue rose 6.6% driven mainly by courier (+18.8% YoY) and the transhipment business from the mail segment (+10.8% YoY). However, operating expenses rose by 8% YoY primarily due to staff and transportation costs. 1H16 profit before tax fell 40% to RM40m due to lower profits from mail and retail segment driven by higher transportation cost for transhipment business and recognition of expired postal order in the previous corresponding period. This brings 1H16 net profit to RM26.2m (-57% 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 and FY17E net profits by 16.9% and 20.8%, respectively, 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 RM3.66 to RM3.24 based on an unchanged 17x FY16E EPS (+1.0 SD above historical mean). Reiterate Underperform.

Risks

Delays in execution of its business transformation plan.

Source: Kenanga Research - 24 Nov 2015