POS posted stronger 1H18 results, coming in within our expectation, thanks to stronger courier earnings coupled with the inclusion of new logistics segment. Moving forward, POS is expected to be a direct beneficiary of growing e-commerce, through its courier services and DFTZ operations. Post-housekeeping, we tweaked FY18/19E earnings by -4%/+5%, with new SoP-TP of RM5.10. Following this, we upgrade our call to MARKET PERFORM.

Within our expectation. 1H18 core net profit (CNP) of RM55.6m came in within our expectation, making up 46% of our full-year earnings forecast. However, it fell short of market’s expectations at only 41% of consensus. We reckon the disparity between us and consensus may possibly be due to the over-optimism from the market towards courier volume growth. No dividends were announced, as expected.

Stronger results compared to last year. 1H18 jumped 53% from 1H17 CNP of RM36.2m, in-line with a revenue surge of 48% from RM811m to RM1.2b. The stronger results can be attributed to the inclusion of logistics and aviation segments, contributing new segmental profit of RM10.8m, coupled with slight improvement from its courier segment. As for the individual quarter, 2Q18 CNP of RM18.4m jumped 3-fold YoY from RM5.5m in 2Q17. Similarly, the stronger earnings can be attributed to the inclusion of logistics and aviation segment, contributing new segmental profit of RM8.1m, coupled with doubtful debt write backs of RM5.7m. Revenue leapt 49% YoY, again due to the inclusion of new aforementioned segments, coupled with higher courier volumes due to increased demand from e-commerce.

Sequentially weaker due to seasonality. On a sequential basis, quarterly 2Q18 CNP declined by half to RM18.4m from 1Q18 CNP of RM37.2m, mostly dragged down by widening losses in its postal services with segmental losses widening to RM50.8m from RM19.3m last quarter. Group revenue dropped by 4%, again mostly from its postal services, due to a net drop in traditional mail volume. However, we are not too overly concerned by the weaker QoQ results given that 2Q has seasonally been a weaker quarter – e.g. 2Q16 and 2Q17 contributed merely 6% and 8%, respectively, to their full-year earnings.

Courier volumes as the key growth driver. Moving forward, main growth driver for POS is largely expected to be from its growing courier volumes, underpinned by the expansive growth of e-commerce. Likewise, POS is also seen as one of the more direct beneficiaries from the Digital Free Trade Zone (DFTZ), being one of the main operators of the first phase of the DFTZ, which is mainly comprised of the efulfilment hub. On the other hand, postal services are expected to continue be loss-making, with no turnaround in sight given the group’s inability to close down post office outlets.

MARKET PERFORM, SoP-TP of RM5.10. Post-housekeeping, we tweaked our FY18E/FY19E earnings forecasts by -4%/+5%. We are also revamping our valuation methodology to SoP (from 26x PER previously), as we believe it is better suited in capturing the value of the group’s individual business segments. As such, we arrived at a new SoP-TP of RM5.10 (from RM4.00 previously). Our SoP valuation is comprised of: (i) DCF-valuation for courier segment, in line with the valuation method used for GDEX, with assumed 12% WACC and 1% terminal growth, (ii) 14x PER for logistics, similar to valuations ascribed to TNLOGIS’ logistics segment, (iii) 1x BV for its postal services, and (iii) holding discount of 20%. Our new TP implies a forward PER of 35x, close to its 5-year mean of 34x. Following this, we also upgrade our call to MARKET PERFORM.

Risks to our upgraded call include (i) slower-than-expected growth in courier volumes, (ii) wider-than-expected losses from its postal services, and (iii) weaker-than-expected logistics segment earnings.

Source: Kenanga Research - 29 Nov 2017