We returned from POS’s quarterly briefing feeling largely neutral. While parcel revenue continued to post double-digit growth, we believe that forward growth rates could see some challenges amid increasing competitiveness in the industry. With that said, POS with the largest network nationwide is most likely to retain its market dominance. Meanwhile, we gathered that the e-fulfilment sorting hub is expected to commence operations in the coming months, utilising the old LCCT space, with Lazada expected as the main tenant. Lastly, postal services segment is expected to stay loss-making in the foreseeable future. Maintain UNDERPERFORM with unchanged TP of RM4.00.

Continued parcel growth. In 1Q18, POS’s parcel courier revenue continued to record double-digit growth of 11%, underpinned by increased e-commerce activity. However, although still a positive growth, this was noticeably lower compared to growth of 23% recorded in FY17. While FY17 courier revenue did benefit positively from rate hikes, we believe the parcel delivery space will post low-to-mid teens growth moving forward, given the increasing competitiveness of the industry. With that said, POS is still expected to retain its market dominance as it has the largest network nationwide.

Sorting-hub to commence in coming months. Utilising the old LCCT space, we gathered that the sorting-hub should be commencing operations in the coming months, with major works (e.g. re-flooring of premises, ICT infrastructures) already completed. Lazada is expected to be the main tenant of the hub, with POS fulfilling its role as the efulfilment services provider. The commencement of the sorting-hub would be timely to capture Lazada’s single day sales on 11 Nov, which we believe will spur further utilisation for the hub.

Postal Services expected to continue losses. Meanwhile, having already registered segmental losses of RM19.3m in 1Q18, and RM146.5m in FY17, its postal services segment is expected to continue running at a loss in the foreseeable future, given the inability to close down post-office outlets. For cost optimisation measures, POS is currently in the midst of gradually integrating Pos Laju services in its retail outlets, coupled with route optimisation plans in which parcel and postal would share the same delivery trips. Additionally, POS had also introduced new services such as the Pos Laju EziBox, Pos Laju EziDrive-Thru, Pos Laju Prepaid Dropbox and Digital Mailbox. However, we believe these new initiatives are likely to be earnings neutral.

Maintain UNDERPERFORM. Post-briefing, we made no changes to our FY18-19E earnings forecasts. Similarly, we kept our TP unchanged at RM4.00, derived based on 26x PER on FY18E. The stock is currently trading at 36x forward PER, which is higher compared to global comparable peers, such as UPS at 19x PER, and SingPost at 25x PER. Given its current lofty valuations, we are retaining our UNDERPERFORM call. Risks to our call include (i) higher-than-forecasted earnings from logistics operations, (ii) lower-than-expected losses from its postal services, and (iii) exponentially higher-than-forecasted parcel growth.

Source: Kenanga Research - 7 Sept 2017