POS posted weaker 3Q18 results, coming in below expectations, mainly from lower margins in its courier segment. Post-earnings, we trimmed FY18-19E earnings by 30-21% to account for lower margins. Moving forward, we expect courier segment to continue as the group’s main growth driver, riding on the expanding e-commerce, although margin pressures from increased competition looms. Maintain MARKET PERFORM with lower TP of RM5.00.

Below expectations. 9M18 core net profit (CNP) of RM64.4m came in below expectations at 56%/49% of ours/consensus full-year forecasts. The disappointing results were due to higher-than-expected operating expenses, especially from its courier segment, with group revenue actually coming in well in-line at 75%/74% of ours/consensus. No dividends were announced, as expected.

Poorer results from higher costs. 3Q17 CNP of RM8.8m plummeted 70% YoY, mainly brought down by deteriorated margins in its courier services (segmental margins of 17%, versus 28% in 3Q17), causing segmental profit to slide 38% YoY despite segmental revenue actually staging a 5% growth YoY. Other factors include: (i) widening losses from its postal services (+9%), (ii) huge deterioration in its international segment (segmental profit down by 63% YoY) due to lower transhipment volume, and (iii) higher effective tax rate of 58% (versus 35% in 3Q17). Cumulatively, 9M18 CNP stayed almost flat (+2%), with poorer performances from its courier (-12%) and postal services (losses widened by 14%) masked by new earnings contribution from the inclusion of Pos Aviation (formerly known as KL Airport Services), thereby bringing logistics and aviation segments higher by 121% YoY.

Sequentially dragged by higher taxes. On a QoQ-basis, 3Q18 CNP came in poorer by 52%, mainly dragged by its higher effective tax rate of 58% (versus 22% in 2Q18), coupled with the aforementioned deteriorated margins in its courier segment, with segmental profit declining 30% QoQ despite a 9% growth in revenue (segmental margins of 17% versus 26% in 2Q18).

Riding on e-commerce growth. Being the group’s largest earnings contributor, POS’ earnings outlook is heavily reliant on the growth of its courier segment, which in turn is largely expected to benefit from the growing e-commerce industry. However, looming margins pressure from increasing industry competition could be a challenge at this current juncture.

Maintain MARKET PERFORM. Post-earnings, we trimmed our FY18- 19E earnings by 30-21% after we lowered our margins assumption for its courier segment, coupled with other minor tweaks. Hence, our SoPTP is also lowered to RM5.00 (from RM5.10 previously). Risk to call include: (i) slower-than-expected growth in courier volumes, (ii) wider-than-expected losses from its postal services, and (iii) weakerthan-expected logistics and aviation segment earnings.

Source: Kenanga Research - 27 Feb 2018