POS posted stronger FY18 results, driven by lower taxes coupled with full-year impact of Pos Aviation after its acquisition in Sep 2016. However, its courier segment continued to slide from margins pressure, while postal services losses also widened. We maintain OUTPERFORM, given the heavy sell-down recently. POS is our preferred choice within the sub-sector, given less demanding valuations and its market leader status against peers.

Above expectations. FY18 core net profit (CNP) of RM88.3m is above expectations, coming in 10%/14% higher than our/consensus earnings estimate, due to better-than-expected performance of POS’ international segment. No dividends were announced, as expected.

Better bottom-line from lower taxes. FY18 CNP grew 24% YoY from lower taxes due to tax incentives. At the PBT-level, earnings actually deteriorated 9% YoY, dragged by: (i) courier segmental profits dropping by 18% YoY, despite revenue growing 13%. We believe this is reflective of margins compression amidst increased competition in the industry, while (ii) postal services losses widened by an additional 10% YoY. These were partially offset by better performances from its logistics and aviation segments. Both segments contributed operating profit of RM37.9m in FY18, as compared to only RM6.5m in FY17, which did not see a full-year impact as the acquisition of Pos Aviation (formerly known as KL Airport Services) was only completed in Sep 2016. As for the individual quarter of 4Q18, CNP of RM25.9m leapt 2.5x YoY, from RM7.4m in 4Q17. This was mostly thanks to lower effective tax rate at only 1.2% due to tax incentives, compared to 58.4% in 4Q17. At the PBT-level, earnings improved 26% YoY, contributed by: (i) better performances from its international segment, with segmental profits improving 35% YoY, coupled with (ii) logistics and aviation segmental profit of RM9.5m, compared to losses of RM6.3m in 4Q17. Sequentially, CNP almost tripled QoQ from RM8.8m in 3Q18, again due to the aforementioned low taxes, coupled with better international segment (segmental profit jumped 169% QoQ).

Largest courier services company in the country. Naturally, being the largest courier services company in Malaysia in terms of market share, POS’ outlook is dependent on parcel volumes driven by the growing e-commerce industry. However, increasing competition of late are resulting in noticeable margins compression, thus impacting earnings. Meanwhile, its postal services are expected to continue to be loss-making for the foreseeable future given the group’s operations of post offices.

Maintain OUTPERFORM, following its recent heavy sell-down, with YTD price deterioration of 32%. Post-model update, we trimmed FY19E by 5% after fine-tuning our growth rate assumptions, given that its core businesses of courier and postal services actually recorded poorer results. Simultaneously, we also introduced our FY20E figures. Likewise, in-line with poor market sentiments of late, we opted for more conservative assumptions in our SoP-valuations, thus arriving at a revised SoP-TP of RM3.95 (from RM5.00 previously), after (i) lowering our valuations of its logistics segment to 10x forward PER, compared to 14x previously, and (ii) lowering valuations for its postal services to 0.7x PBV, from 1.0x PBV previously, given its continued loss-making status. Nevertheless, our current valuation still implies capital yield of 11% in addition to dividend yield of c.3%, thus warranting the OUTPERFORM call. POS is our preferred choice should investors require exposure in the courier services space given its market-leader status coupled with less demanding valuations against peers. 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 - 30 May 2018