1H17 net profit of RM38.6m (47% YoY) came in within expectations at 43% and 46% of our and consensus fullyear net profit forecasts, respectively. Maintain UNDERPERFORM and TP of RM2.89 based on 19x FY18EPS (-0.5SD below 5-year historical mean). The stock is currently trading at 26x FY18 PER which is 50% higher compared to peers’ average of 17x.

Key Result Highlights QoQ, 2Q17 turnover fell 5% due to lower revenue in mail business (- 14.4%) resulting from a net drop in traditional mail volume and lower transaction from retail segment in the commercial private section for unit trust but mitigated by higher transhipment volumes. As a result of lower turnover, higher operating cost incurred and losses at the mail segment, pre-tax profit fell 68% to RM13.5m. This brings 2Q17 net profit to RM6.7m exacerbated by a higher effective tax rate of 50% compared to 25% in 1Q17. No dividend was declared in this quarter as expected.

YoY, 1H17 revenue rose 3%, driven mainly by courier (+22% YoY) and others (digital certificates, printing and insertion) (+33% YoY) which more than offset the lower mail business (-6% YoY). 1H17 net profit rose 47% due to stronger performance from courier division with stronger EBIT (+>100%) and better margins registered in courier and others (digital certs, printing and insertion).

Outlook. Looking ahead, we understand that KLAS is regarded as an important part of Pos’ aspiration to become a full-fledged logistics 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. In an effort to enhance customer experience, Pos will introduce more 24/7 e-commerce convenient touch points by introducing Pos Laju EziBox (parcel locker service), Pos Laju EasyDrop (drop-off facility) as well as enhancement of facilities at all Pos Laju Centres and post offices nationwide. Over the next subsequent quarters, we expect Pos Malaysia to continue to be affected by weakness in conventional mail volume and the low margin trans-shipment business. Courier service demand is expected to improve in the coming years due to the e-commerce boom.

Rating & Valuation. No changes to our earnings forecasts. Maintain UNDERPERFORM and a TP of RM2.89 based on 19x FY18E EPS (- 0.5SD below 5-year historical mean). The stock is currently trading at 26x FY18 PER which is 50% higher compared to peers’ average of 17x. in terms of market capitalisation and earnings such as United Parcel Service (18.8x FY17 PER); Singapore Post (18.8x FY18 EPS) and Deutsche Post (13.2x FY17 PER).

Source: Kenanga Research - 25 Nov 2016