Pos Malaysia Berhad (POSM) will be raising postage rates for registered mails, commercial mails and small parcels following Government’s approval, effective 1 February 2020. The last postage rates revision was in 2010 and we expect its share price to open higher following the announcement. We now forecast a FY20 Net Profit of RM84m instead of loss of RM54m. TP is raised from RM1.25 to RM1.95 based on 18x FY20 EPS. Upgrade from Underperform to Outperform.

Tariff raised for commercial postage rates. POSM will be raising postage rates for registered mails, commercial mails and small parcels of <2kg following the approval by the Government on the new rates, effective 1 February 2020. The last postage rates revision was in 2010. The revised commercial postage rates include: (i) commercial stamp rate raised 70 sen to RM1.30, (ii) commercial registered mail tariff hiked by 90 sen to RM3.10, (iii) commercial private letter box raised by RM150 to RM200, and (iv) non-commercial registered mail increased by 20 sen to RM2.40. Pos Malaysia’s commercial clients represent 95% of all mail users in Malaysia with only 5% comprising individual mail users. Besides domestic postage rates, international postal services saw an increase in last mile delivery cost of up to 30% for small parcels below 2kg, beginning January 2020. This reflects the recent decision by the Universal Postal Union (UPU) from the Geneva Extraordinary Congress in September 2019, affecting postal operators globally. As such international postage rates for parcels of <2kg will be raised by 30%.

Ballpark figure since difficult to quantify. Given that the actual breakdown of mail volumes by their respective categories is not available, we are unable to assess in detail the impact of the increase in postal tariffs on POSM’s earnings. Furthermore, it is difficult to quantify any potential decline in mail volumes, which is a reasonable possibility, due to the hike in stamp prices. Back-on-our-envelope calculation, assuming the following: a 3% decline in volume, commercial registered at 10%, non-commercial registered at 50% and commercial stamp at 40% of the overall 95% commercial clients of all mail users in Malaysia, our FY20E earnings is now expected to register a net profit of RM84m.

Short-term reprieve. The upward revision in postal rates is a positive to POSM. However, we would have preferred for the tariff to be increased based on a schedule or formula possibly indexed to inflation or based on certain quantitative or even qualitative KPIs, as compared to a one-time adjustment. The key risk of this one-time adjustment includes the inability of POSM to fully accommodate its social and commercial responsibilities, especially if the hike in commercial postal rates potentially causes mail volumes to deteriorate even further from current levels.

Upgrade from UP to OP. Raise FY20 earnings from Net Loss of RM54m to Net Profit of RM84m due to the tariff hike. Our TP is also raised from RM1.25 to RM1.95 based on 18x FY20 EPS (previously based on 0.6x FY20E BVPS due to loss-making position). Upgrade from Underperform to Outperform.

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

Source: Kenanga Research - 29 Jan 2020