9M19 recorded a loss after tax of RM24.6m which came in below expectations compared to our anticipated net profit of RM0.8m and consensus RM20.9m full-year forecast. The variance to our estimate was due to weaker-than-expected performance from the postal services. Post-results, we slashed FY19-20E earnings by 50%. Maintain UNDERPERFORM with a TP of RM1.50 based on unchanged 0.6x FY19 BVSP.

9M19 recorded a loss after tax of RM24.7m which came in below expectations compared to our net profit forecast of RM0.8m and consensus RM20.9m full-year forecast. The variance from our estimate was due to weaker-than-expected performance from the postal services division. No interim dividend was declared in this quarter as expected.

Results Highlights. YoY, 9M19 plunged into losses of RM24.7m, from net profit of RM63.8m in 9M18, dragged by: (i) widening losses (+30%) in postal services, (ii) lower courier profits (-22.5%) amidst lower operating margin (-6.6ppt from 21.5% to 14.9%), and (iii) international segment booking in losses of RM8.8m, from profit of RM7.4m in 9M18, due to loss of a major customer.

QoQ, 3Q19 losses narrowed marginally to RM13m from RM16.6m in 2Q19 due to: (i) narrower losses in postal services, and (ii) international segment’s losses narrowing to RM0.3m compared to a loss of RM11m in the previous corresponding period. However, courier division’s profit fell 53%.

Outllook. We believe POS is 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, losses are only expected to continue widening moving forward.

Cut FY19E/FY20E net profit by 50%. Due to the weak set of results, we now forecast a loss of RM5m in FY19 and cut our FY20E net profit by 50% after accounting for higher losses in its postal services.

Maintain UNDERPERFORM. Our UNDERPERFORM call is premised on its earnings uncertainty going forward. TP is also kept unchanged at RM1.50 based on unchanged 0.6x FY19 BVSP. We are using PBV methodology due to the uncertain and volatile quarterly earnings ahead.

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

Source: Kenanga Research - 28 Feb 2019