Period

3Q16/9M16

Actual vs. Expectations

9M16 net profit of RM49m (-55% YoY) came in below expectations, at 48% and 60% 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 sixth consecutive quarterly earnings disappointment.

Dividends

No dividend was declared during the quarter. Key Result

Highlights

QoQ, 3Q16 turnover rose 24% driven largely by the mail segment (+38% QoQ) due to higher volume from transhipment. As a result of higher turnover, lower operating cost and higher profitability at the mail segment, pre-tax profit rose to RM29.6m from RM6.6m in 2Q16. This brings 3Q16 net profit to RM22.5m boosted by a lower effective tax rate of 24% compared to 47% in 2Q16.

YoY, 9M16 revenue rose 17% driven mainly by courier (+18.8% YoY) and the transhipment business from the mail segment (+27.8% YoY). 9M16 profit before tax fell 55% to RM70m due to lower profits from mail and retail segments driven by higher transportation cost for transhipment business and recognition of expired postal order in the previous corresponding period. This brings 9M16 net profit to RM48.7m (-55% YoY).

Outlook

POS Malaysia recorded its sixth quarterly earnings disappointment. More importantly, POS Malaysia could see a massive EPS dilution if the offer to acquire KLAS from DRBHicom goes through. Recall that DRBHicom is offering to sell KL Airport Services (KLAS) to 32.3%-owned POS Malaysia for a total consideration of RM835.2m via the issuance of 250.8m new ordinary shares in Pos Malaysia at an issue price of RM3.33 per share. Based on KLAS’ FY15 pre-tax profit of RM7.2m, the offer price valued KLAS at >100x PER. For illustration purposes, KLAS registered a pre-tax profit of RM7.2m in FY15, and assuming a corporate tax rate of 25% and a 30% growth rate per annum, on a full-year basis, POS Malaysia FY17 net profit would be enhanced by 7%. We expect EPS to be diluted by 30-40% given POS Malaysia’s enlarged shares case rising by 47%.

Change to Forecasts

We downgrade our FY16E and FY17E net profits by 21% and 18%, 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 RM3.24 to RM2.40 based on unchanged 16x FY16E EPS. However, the share price of POS Malaysia has retraced 55% from its high and is currently trading at an undemanding 16x FY16 EPS offering a decent dividend yield of 6%. Upgrade from Underperform to Market Perform. However, there are insufficient catalysts to further upgrade the stock.

Risks

Delays in execution of its business transformation plan.

Source: Kenanga Research - 24 Feb 2016