Pos Malaysia Berhad (POSM) proposed to divest its wholly owned World Cargo Airline Sdn Bhd (WCA) to Asia Cargo Network Sdn Bhd (ACN) via issuance of new shares in WCA to ACN for RM40m cash. We view positively this loss-making non-core divestment will yield a RM63m disposal gain, while losses at the group level is expected to be lessened. Meanwhile, given POS’ inability to close down post offices, coupled with its unionised workforce and losses in its postal services segment, earnings are expected to continue to be under pressure. The saving grace is a 4.5% dividend yield. TP is RM0.90 based on unchanged 10x FY21 EPS. Reiterate MP.

Non-core divestment explained. In an announcement to Bursa Malaysia, POSM via wholly-owned POS Aviation Sdn Bhd (POS Aviation) has proposed to partially divest wholly-owned World Cargo Airline Sdn Bhd (WCA) to Asia Cargo Network Sdn Bhd (ACN). Essentially the deal entails WCA issuing shares representing 51% stake of the total enlarged shares in WCA for a cash consideration of RM40m. The proceeds will be utilised by WCA to mainly settle WCA’s intercompany debts owed to Pos Aviation Group and Pos Malaysia totalling RM37.8m. Upon completion of the proposed transaction, ACN and Pos Aviation will hold 51% and 49% equity interest in WCA, respectively. We view this latest corporate development positively since this non-core divestment will yield a RM63m disposal gain and losses at the group level is expected to be lessened since WCA’s 9MFY19 net loss is approximately RM32m. Since WCA is a non-core business to Pos Malaysia, this will allow WCA to be managed more effectively with improved reliability and service performance by ACN which is experienced in the aviation industry. WCA provides services primarily for POSM for the movement of postal and courier products to Sabah & Sarawak. The proposed transaction is expected to be completed within four months from signing of the share subscription agreement.

Impact to financials. For the 9-month FYE December 2019, WCA’s audited revenue was approximately RM83m while loss after taxation was approximately RM32m. Its audited net liabilities as at 31 December 2019 was RM66.4m. For illustrative purposes, the reduction from 100% to 49% stake will increase our FY21E net profit by 20%. The RM63m (8.0 sen/share) gain will increase POSM’s book value from RM1.80 to RM1.88 as at 31 March 2020. The transaction is subject to obtaining approvals from various relevant parties and authorities as well as finalisation of financing between ACN and its financiers with estimated time of completion within 4 months from signing the share sale agreement. As such, we shall keep our earnings forecasts for now.

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.

Maintain MP. No changes to our FY20E/FY21E earnings forecasts for now. Our TP is RM0.90 based on unchanged 10x FY21E EPS. The saving grace is a 4.5% dividend yield.

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 - 21 Aug 2020