FY19 core net loss of RM126.1m compared to our/consensus net loss estimates of RM5m/RM29.6m which came in below expectations. The variance to our estimate was due to weaker-than-expected performance from the postal services segment. Post-results, we forecast a loss of RM15m in FY20 instead of a profit. Downgrade TP from RM1.50 to RM1.30 based on unchanged 0.6x FY20E BVPS. Reiterate UP.

FY19 recorded a core net loss of RM126.1m compared to our/consensus net loss estimates of RM5m/RM29.6m which came in below expectations. The variance to our estimate was due to weaker-than-expected performance from the postal services segment. No interim dividend was declared in this quarter as expected. A final dividend is only expected in July.

Results’ highlights. YoY, FY19 profit before tax plunged from RM117.3m to a loss before taxation of RM158.4m due to widening losses from mail segment and impairment charges of RM39.6m from the loss of goodwill in Pos Logistics. This brings FY19 core net loss to RM126.1m (excluding RM39.6m goodwill impairment) compared to a net profit of RM93.3m attributed to losses from mail segment as a result of continuing double-digit contraction in mail volume and bill payments reflecting the increasing substitution of letters with electronics media. The impairment of goodwill in Pos Logistics is a result of a performance that is below expectations due to competitive market conditions.

QoQ, 4Q19 core losses widened to RM101.5m (excluding RM39.6m goodwill impairment) from RM13m in 3Q19 due to: (i) losses in courier (from making profits to a loss of RM70m), and (ii) logistics and aviation entering into a loss of RM4.1m from a profit of RM12.1m in 3Q19.

Outllook. We believe POS is suffering from an environment of elevated opex at this current juncture. 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 segment, losses are only expected to continue widening moving forward.

Forecast a loss for FY20E from a profit. Due to the weak set of results, we now forecast a loss of RM15m in FY20 after accounting for higher losses in its postal services.

Maintain UNDERPERFORM. Our UNDERPERFORM call is premised on its earnings uncertainty going forward. We roll forward our valuation base from FY19E to FY20E. TP is lowered from RM1.50 to RM1.30 based on an unchanged 0.6x FY20E BVPS. 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 - 23 May 2019