12M17 net profit of RM84.1m (+33% YoY) came in below our expectation but in line with consensus at 99% of fullyear forecasts. The negative deviation from our result is due to higher-than-expected operating expenses. Despite the slight earnings downgrade, we raised our TP to RM4.00 (previously RM3.70). Our valuation is based on 26x FY18 EPS (+0.5 SD above 5-year forward historical mean compared to previously 23x PER). Maintain UNDERPERFORM.

Key Result Highlights QoQ, 4Q17 turnover rose came in flat largely due to higher contribution from mail business (+12%) but offset by lower courier (- 8%) and international (-12%) segments. However, due to higher cost incurred, pre-tax profit fell 53%. This brings 4Q17 PATAMI to RM10.6m exacerbated by a higher effective tax rate of 58% compared to 34% in 3Q17. The Board of Directors will consider the payment of dividend when the full-year account is adopted in June 2017.

YoY, 12M17 revenue rose 21% due mainly to the inclusion of KLAS, which was acquired in Sept 2016 and better performance from courier (+23%), and others (digital certificates, printing and insertion) (+24%) which more than offset the lower mail business (-5%) and transhipment (-26%). 12M17 net profit rose 33% 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. We believe the share price of POS Malaysia has already factored the recent news flow of the Digital Free Trade Zone and its valuations are running ahead of fundamentals. 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.

Downgrade FY18 and FY19 net profits. We downgrade our FY18 and FY19 net profits by 3% and 2%, respectively, taking into account higher operating cost.

Rating & Valuation. Despite the slight earnings downgrade, we raised our TP to RM4.00 (previously RM3.70). Our valuation is based on 26x FY18 EPS (+0.5 SD above 5-year forward historical mean compared to previously 23x PER). The stock is currently trading at 36x FY18 PER which is higher compared to peers’ average including United Parcel Service (13.3x FY18 PER) and Singapore Post (23.2x FY18 EPS). Maintain UNDERPERFORM.

Source: Kenanga Research - 24 May 2017