According to a media release, Pos Malaysia Berhad (Pos Malaysia) and Tigers Global Logistics (M) Sdn. Bhd. (Tigers) have signed a collaboration agreement to offer Malaysia’s maiden cross-border e-Fulfilment business solutions within the Asia-Pacific region. We believe this latest positive corporate development by POS Malaysia came in largely within market expectations. Maintain UNDERPERFORM. Our TP is RM3.70 based on 23x FY18 EPS.

Tie up with Tigers. We are positive on this corporate development by Pos Malaysia considering that e-commerce accounts for approximately 30-33% of the group’s total revenue which is gaining momentum. As at 9M17, e-commerce accounted for an estimated 32% of group revenue which is gaining importance due to the declining traditional mail segment. The collaboration will allow Pos Malaysia to ride on the fast-growing e-commerce services sector which presents an enormous opportunity for global logistics players to provide total integrated logistics services to e-retailers that require customised solutions for their complex supply chain. POS Malaysia has the capability given that they already have first-mile and last-mile presence with KL Airport Services (KLAS) and Pos Malaysia. We are keeping our FY17E and FY18E earnings unchanged as we have sufficiently factored in such earnings contribution into our earnings model. We are unable to quantify any earnings enhancement for now and only expect meaningful contribution over the medium to longer term. For illustrative purposes, assuming an additional RM200m per annum revenue from this tie-up and a gross profit margin of 10% which is an additional RM20m gross profit accrue to POS Malaysia, Tigers is a global logistics and transportation company that specialises in supply chain solutions, e-Fulfilment and transportation by air, sea and road.

Mandate to manage the entire supply chain. Under this collaboration, Pos Malaysia will have the mandate to manage the entire supply chain process, including customs clearance, product handlings, pick and pack as well as last mile delivery and in turn, Tigers will be responsible for the continuous investment in hardware, network and systems. Following this collaboration, the first ever Regional e-Fulfilment Hub is expected to be established nearby LowCost Carrier Terminal in Sepang. This hub is expected to benefit both international and local e-Commerce players and customers across 30 countries in the Asia-Pacific region where it will be used to manage office of exchange, air conveyance and e-Fulfilment capabilities.

Running ahead of fundamentals. We believe the share price of POS Malaysia has already factored in this latest corporate development coupled with the recent news flow of the Digital Free Trade Zone and its valuations are running ahead of fundamentals.

Outlook. Looking ahead, 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 and overcome the declining mail segment over the longer term due to the e-commerce boom. The synergy from KLAS is only expected to 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.

Maintain Underperform. Our TP is raised to RM3.70 (previously RM3.32) based on 23x FY18 EPS (in line with 5-year forward historical mean compared to previously 21x PER). However, the latest development is not sufficient to warrant an upgrade in rating. The stock is currently trading at 31x FY18 PER which is higher compared to peers’ average of 17x, including United Parcel Service (17.9x FY17 PER) and Singapore Post (24.2x FY17 EPS).

Source: Kenanga Research - 6 Apr 2017