9M17 net profit of RM73.4m (+51% YoY) came in above expectations at 79% and 82% of our and consensus full- year forecasts, respectively. The positive deviation from our result is due to better-than-expected performances from courier segment. We upgrade our FY17 and FY18 net profits by 9% and 4%, respectively. Upgrade our TP from RM2.89 to RM3.32 based on 21x FY18 EPS (in line with historical mean). Maintain UNDERPERFORM.

Key Result Highlights

QoQ, 3Q17 turnover rose 60% largely due to inclusion of logistics business- KL Airport Services Sdn Bhd. Revenue rose across the board, including mail business (+6%), international (+80%) due to higher volume transhipment and courier (+18%). As a result of higher turnover, and contribution from logistics which more than offset losses at the mail segment, pre-tax profit rose 52.7%. This brings 3Q17 net profit to RM34.8m boosted by a lower effective tax rate of 25% compared to 44% in 3Q17. No dividend was declared in this quarter as expected.

YoY, 9M17 revenue rose 13% due mainly to the inclusion of KLAS, which was acquired in Sept 2016 and better performance from courier (+25%), transhipment and others (digital certificates, printing and insertion) (+24%) which more than offset the lower mail business (-5%) and transhipment (-43%). 9M17 net profit rose 50% 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.

Upgrade FY17 and FY18 net profits. We upgrade our FY17 and FY18 net profits by 9% and 4%, respectively, taking into account higher contribution from courier segment.

Rating & Valuation. Upgrade our TP from RM2.89 to RM3.32 based on 21x FY18 EPS (in line with 5-years historical mean). The stock is currently trading at 28x FY18 PER which is 55% higher compared to peers’ average of 17x, including United Parcel Service (17.7x FY17 PER); Singapore Post (20.6x FY18 EPS) and Deutsche Post (14.5x FY17 PER). Maintain UNDERPERFORM.

Source: Kenanga Research - 24 Feb 2017