12M16 net profit of RM63.1m (-50% YoY) came in below expectations, by 14% and 7% of our and consensus fullyear net profit forecasts, respectively. The negative variance from ours was due to higher-than-expected operating expenses. This quarter marked the seventh consecutive quarterly earnings disappointment. Note that the first and final dividend for FY16 will be proposed on the announcement of the audited accounts on 23 June 2016.

Key Result Highlights QoQ, 4Q16 turnover fell 12% due to the mail segment (-26% QoQ) which we believe due to lower traditional mail volume more than offset the higher volume from transhipment. As a result of lower turnover, higher operating cost and lower profitability at the courier segment, pre-tax profit fell 14% to RM25.5m. This brings 4Q16 net profit to RM14.4m dragged down by a higher effective tax rate of 44% compared to 24% in 3Q16.

YoY, 12M16 revenue rose 15% driven mainly by courier (+15.8% YoY) and the transhipment business from the mail segment (+22.1% YoY). 12M16 profit before tax fell 48% to RM95.2m 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 12M16 net profit to RM63m (-50% YoY).

Outlook. POS Malaysia has recorded its seventh quarterly earnings disappointment. More importantly, POS Malaysia could see a massive EPS dilution if the offer to acquire KL Airport Services (KLAS) from DRBHicom materialise. Recall that DRBHicom is offering to sell 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’s FY17 net profit would be enhanced by 7%. We expect EPS to be diluted by 30-40% given POS Malaysia’s enlarged shares base by 47%. We understand that KLAS is regarded as an important part of POS’ aspiration to become a fullfledged ogistics solution player. However, we expect full synergy to only bear fruits over the longer run as capex and expansion costs could be a drag on earnings.

Change to Forecasts. We downgrade our FY17E net profit by 10% 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 RM2.40 to RM2.23 based on unchanged 15x CY17E EPS. Downgrade from Market Perform to Underperform. 

Source: Kenanga Research - 24 May 2016