Although 1Q18 results came in stronger on the back of higher courier volume coupled with new logistics earnings, we deemed it to be broadly within our expectation as we anticipate weaker quarters ahead due to seasonality. Moving forward, POS is expected to benefit from the supportive growth of e-commerce, and is understood to be a direct beneficiary of the upcoming DFTZ. Meanwhile, the trajectory for traditional mail is expected to continue sliding and be a drag on earnings. No changes were made to our forecasts. Maintain UNDERPERFORM with TP of RM4.00.

Deemed broadly within our expectations. Coming in at 31% and 22% of our and consensus forecasts, respectively, 1Q18 core net profit (CNP) of RM37.2m is deemed to be broadly within our expectation as we anticipate weaker quarters ahead due to seasonality. However, the results were below consensus expectations. We believe the disparity between us and consensus was due to over-optimism from the market towards its courier volume growth, as well as earnings contributions from its new logistics operations. No dividends were declared, as expected.

1Q18 higher YoY, in-line with higher revenue. 1Q18 CNP came in 21% higher YoY (versus RM30.7m in 1Q17), in-line with higher group revenue of RM611.6m (+47% from RM415.9). This was driven by increased courier revenue (+11%, from RM162.8m to RM180.9m), coupled with the inclusion of the newly acquired logistics business which contributed RM164m of additional revenue. Meanwhile, the better earnings were also partially chipped by widening losses from its postal services segment, from segmental losses of RM2.4m to RM19.3m.

QoQ surged as well. Despite a slight QoQ drop in revenue by 4% (from RM635.6m), bottom-line jumped significantly (+358%, from RM8.1m), mainly on the back of: (i) lower effective zakat and tax rate (18% vs 58%), (ii) lower losses from its postal services segment (from segmental losses of RM46.9m), and (iii) RM6.3m segmental losses registered under its new logistics business in the last quarter.

Parcel volume growth from e-commerce expected. The main growth driver for POS is expected to be the growing courier volume underpinned by the supportive growth of e-commerce coupled with the government’s continued efforts in rolling-out the Digital Free Trade Zone. Additionally, POS’ group earnings are expected to receive a bump this year with the inclusion of its new logistics business arising from the completed acquisition of KLAS last year. On the other hand, traditional mail volumes continue to slide. Meanwhile, margin pressure in its courier services is also expected as the industry turns increasingly competitive.

Maintain UNDERPERFORM, with unchanged TP of RM4.00, derived based on 26x PER on FY18E. No changes were made to our earnings forecasts. The stock is currently trading at 34x forward PER, which is higher compared to global comparable peers, such as UPS at 19x PER, and SingPost at 25x PER. Risks to our call include (i) higher-than-forecasted earnings from logistics operations, and (ii) lower-than-expected losses from its postal services.

Source: Kenanga Research - 18 Aug 2017