1HFY19 (due to FYE changed from Mar to Dec) core net loss of RM44m compared to our/consensus full-year estimates of -RM41m/-RM43m, came below expectations. The variance to our estimate was due to weaker-than-expected performance in the postal services segment. Post-results, we forecast wider losses of RM52.6m for FY19E but keep our FY20E forecast unchanged. TP is RM1.25 based on unchanged 0.6x FY20E BVPS. Reiterate UP.

1HFY19 (due to FYE changed from Mar to Dec) core net loss of RM44m compared to our/consensus full-year estimates of - RM41m/-RM43m came in below expectations. The variance to our estimate was due to weaker-than-expected performance in the postal services segment. No interim dividend was declared in this quarter as expected.

Results’ highlights. QoQ, 2QFY19 losses widened to RM29.3m from RM15.1m in 1QFY19 due to widening losses from international (+90%) and mail segment (+1%) albeit large base effect as a result of declining mail volumes, reflecting the increasing substitution of letters with electronics media and elevated opex to serve the Universal Service Obligation (USO). This is further exacerbated by lower profit from Courier (-33%) due to lower volume from walk-in customers while Aviation was hit by lower tonnage of cargo handled.

YoY, 1HFY19 core losses widened to RM44m compared to RM11.6m in 1HFY18 due to: (i) continuous structural decline in traditional mail volume largely on electronic substitution, (ii) higher losses at International which we believe was partly due to lower utilisation rate, and (iii) lower contribution at Logistics due to completion of a project.

Outlook. We believe POS is suffering from an environment of elevated opex at this 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 moving forward. The courier business continues to operate in a competitive environment pressured by price and cost challenges. The group is continuing with its efforts to manage cost whilst increasing operating efficiency. The Integrated Parcel Centres (IPC) in Shah Alam and newly completed facility in KLIA has increased the processing capacity by 77% from 300,000 to 530,000 parcels per day.

Forecast wider losses for FY19E, maintain FY20E earnings forecast. Due to the weak set of results, we now forecast wider losses of RM52.6m for FY19 after accounting for higher losses in its postal services segment.

Maintain UNDERPERFORM. Our UNDERPERFORM call is premised on earnings uncertainty going forward. TP is RM1.25 based on an unchanged 0.6x FY20E BVPS (-1.5SD below 5-year historical forward mean). 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 - 26 Nov 2019