1Q19 results severely underperformed, caused by poorer performances across all segments, coupled with the unusually high effective tax rate. Post-results, we slash FY19-20E earnings substantially by 75-52%. Expect POS to suffer from an elevated opex business environment going forward. Downgrade to UNDERPERFORM with TP of RM3.10, given the uncertainty in earnings outlook and grossly unattractive PER valuations post earnings cut.

Grossly below expectations. 1Q19 core earnings of RM3.1m (arrived after stripping-off gains on disposals totalling RM1.8m) came in grossly below expectations, making up only 3% of our, and consensus, full- year earnings forecasts. The huge disparity was due to severe underperformance in its postal services, courier and international segments, coupled with its unusually higher effective tax rate of 64% this quarter. The higher taxes were caused by under-accrual of prior year’s deferred tax and increase in expenses, which were non-tax deductible. No dividends were announced, as expected.

Severely poor results. YoY, core earnings plunged 91% as (i) postal services losses widened 70% to RM32.9m, (ii) courier segmental profits declined by 38% as a result of huge margins deterioration, with segmental margin of 12.5% as compared to 22.5% in 1Q18, and (iii) aforementioned higher effective tax rate. Sequentially, core earnings deteriorated 88% QoQ, similarly due to: (i) widening losses of postal services by an additional 30%, (ii) 8% drop in courier earnings due to lower revenue, (iii) international segmental profit plunging 69% QoQ, and (iv) aforementioned higher effective tax rate.

Deteriorating margins moving forward. We believe POS is currently suffering from an environment of elevated opex at the current juncture. Increasingly intensifying competition coupled with continued expansion efforts have led to its courier segment’s operating margins halved from last year, thus causing huge profit deterioration despite healthy volume and revenue growth. Meanwhile, given POS’ inability to close down post offices, coupled with its unionised workforce, losses in its postal services are only expected to continue widening.

Huge cut in earnings forecasts. In review of its devastatingly disappointing results, we find it necessary to greatly slash our FY18- 19E earnings by 75-52%, after accounting for: (i) greater losses in its postal services, (ii) lowered margins for its courier segment, (iii) lowered growth assumption for its international segment, and (iv) higher effective tax rates.

Downgrade to UNDERPERFORM with a lower SoP-TP of RM3.10 (from OP and TP of RM3.95 previously). Following the earnings cut, POS is currently trading at very unattractive PER valuations of 136-54x on FY19-20E earnings. Our UNDERPERFORM call is premised on its margins compression environment, thus leading to earnings uncertainty going forward.

Risks to our call include: (i) lower-than-expected losses in postal services, (ii) better-than-expected margins in its courier segment, and (iii) lower-than-expected effective tax rate.

Source: Kenanga Research - 27 Aug 2018