FY19 (due to FYE changed from Mar to Dec) core net loss of RM93m compared to our/consensus full-year estimates of – RM53m/-RM7.7m, came below expectations. The variance to our estimate was due to weaker-than-expected performance in the postal services segment. However, due to the upward revision in postal rates for registered mails, commercial mails and small parcels following Government’s approval, effective 1 February 2020, we keep our FY20E forecasts unchanged. TP is RM1.95 unchanged based on 18x FY20 EPS. Reiterate OP.

Results’ highlights. QoQ, 3QFY19 Core Net Losses (CNL) excluding provision for re-delivery of aircraft (RM28.6m) and impairment loss of goodwill in Logistics and Aviation segments (RM93.9m) widened to RM48.6m from RM29.3m in 2QFY19 due to enlarged losses from mail segment 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 losses at Courier due to lower volume from walk-in customers.

YoY, FY19 CNL widened to RM93m compared to RM25m in 9MFY18 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.

Tariff hikes for commercial postage rates. The upward revision in postal rates is a positive to Pos Malaysia Berhad (POSM) which will be raising postage rates for registered mails, commercial mails and small parcels following Government’s approval, effective 1 February 2020. 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 the onetime 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. Meanwhile, given POS’ inability to close down post offices, coupled with its unionised workforce and losses in its postal services segment turning the postal division around will remain challenging. However, with the postal rate hike effective 1 Feb, we have pencilled in a lower loss for postal for FY20. 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.

Maintain OP. Our TP is RM1.95 based on 18x FY20 EPS. The upward revision in postal rates is a positive to POSM which will be raising postage rates for registered mails, commercial mails and small parcels following Government’s approval, effective 1 February 2020.

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

Source: Kenanga Research - 26 Feb 2020