The weaker set of 1H19 results is a big let-down, plunging into losses, due to widening losses in its postal services and international segments. Post-results, we slashed FY19- 20E earnings substantially by 97-64%. Tough environment expected going forward, owing to elevated opex, lossmaking post offices, increased competition and unionised workforce. Maintain UNDERPERFORM with a lowered TP ofRM2.95 given the uncertain earnings  outlook.

Grossly missing expectations. 1H19 results grossly missed expectations, raking in net loss of RM11.6m against our FY19E net profit of RM24.1m and consensus of RM64.2m. The underperformance was due to wider-than-expected losses in its postal services and international segments. However, absence of dividends was expected.

Plunged into losses. 1H19 results plunged into losses of RM11.6m, from net profit of RM54.7m in 1H18, dragged by: (i) widening losses (by 58%) in postal services, (ii) lower courier profits (by 18%) amidst depressing margin (-7 ppt), and (iii) international segment booking in losses of RM8.4m, from profit of RM4.3m in 1H18, due to loss of a major customer.

As for the individual quarter, YoY, 2Q19 plunged into losses of RM16.6m from net profit of RM18.8m in 2Q18, due to: (i) widening losses in postal services by 53%, and (ii) international segment plunging to losses of RM11m, from RM0.8m profit in 2Q18, from loss of a major customer. Similar reasons are attributable on a QoQ-basis comparison (from net profit of RM5m in 1Q19), with the net loss attributed to: (i) postal services more than doubled its losses, and (ii) aforementioned losses in international segment offsetting jump in courier profits by +82% on the back of margin recovery.

Heightened opex environment. 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 stagnating margins, thus causing profit deterioration despite volume and revenue growth. Meanwhile, given POS’ inability to close down post offices, coupled with its unionised workforce and losses in its postal services are only expected to continue widening moving forward.

Cut in earnings forecasts. In review of its hugely disappointing results, we find it necessary to slash our FY18-19E earnings by 97- 64%, after accounting for: (i) greater losses in its postal services, and (ii) lowered contributions from its international segment.

Maintain UNDERPERFORM, with a lowered SoP-TP of RM2.95 (from RM3.10 previously). Our UNDERPERFORM call is premised on its 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 - 22 Nov 2018