1QFY20 net loss of RM49m compared to our/consensus fullyear net profit estimates of RM84m/RM13m, came below expectations. The variance to our estimate was due to weaker-than-expected performance in the postal services segment. Despite upward revision in postal rates for registered mails, commercial mails and small parcels following Government’s approval, effective 1 February 2020, the group continue to record losses. Downgrade FY20E/FY21E net profit by 22%/26%. Downgrade our TP from RM1.07 to RM0.90 based on unchanged 10x FY21E EPS. Downgrade from OP to MP.

Results’ highlights. QoQ, 1QFY20 net losses remained flat at RM49m despite a postage rates revision effective 1 February 2020. YoY, 1QFY20 postal segment’s mail business saw an increase in revenue of 1.0% due to the new postal tariff that took effect on the 1st February 2020. Mail business monthly revenue increased by RM11m in February 2020 but saw flat growth in March 2020 as the rapid spread of COVID- 19 resulted in a sharp decline in commercial mail volume. COVID-19 also impacted Postal segment’s retail and international business, with fewer retail transactions recorded in post offices and significantly lower cross-border transhipment tonnage handled in March 2020 as customers remained cautious in trading outside their homes. Cancellations of commercial and cargo flights and suspension of business activities by international partners were big factors behind the decline in international business. Consequently, all the divisions across the board suffered losses namely Postal, Logistics and Aviation. However, net losses narrowed to RM49m compared to RM141m in 1Q (Mar quarter) 2019 largely due to the postage tariff revision in Feb 2020.

Outlook. 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 will continue 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 its processing capacity by 77% from 300,000 to 530,000 parcels per day.

Downgrade our FY20E/FY21E net profit by 22%/26% to take into account lower contribution from postal and courier segments.

Downgrade from OP to MP. Correspondingly, Our TP is lowered from RM1.07 to RM0.90 based on unchanged 10x FY21E EPS (roll forward valuation base from FY20E to FY21E). The saving grace is a 4% dividend yield. Downgrade from Outperform to Market Perform.

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 - 16 Jun 2020