POS’s 1HFY22 results met expectation. It turned in a profit at the pre-tax level for the first time in 15 quarters in 2QFY22 on the back of unrelenting cost cutting initiatives. On a more downbeat note, its conventional mail business will continue struggling to stay relevant in the digital age. Not helping either is the intensifying competition from new courier players including new in-house delivery service units of major e-commerce players. Maintain MP with a DCF-derived TP of RM0.55 (WACC: 6.8%; TG: 0%).

Within expectations. 1HFY22 core net loss of RM35.1m came in at 53% and 38% of our/consensus full-year loss forecast.

Results’ highlight, YoY, 1HFY22 core net loss narrowed more than half to RM35.1m despite lower revenue (-11%) mainly due to lower operating costs (-17%) driven by effective cost savings effort including the Mutual Separation Scheme (MSS) exercise last year. Postal segment sales (-17%) were affected by the shifting of purchasing trend from online shopping back to bricks-and-mortar shopping since the start of endemic phase, worsened by lower demand from major ecommerce players shifting towards internal delivery capabilities (i.e. Shopee shifting toward its own Shopee Express). Logistics segment sales (-17%) was in a seasonally lower trend and suffered adverse impact in its marine business from the coal export ban imposed by the Indonesian government in January 2022. On the other hand, stronger aviation sales (+17%) from the re-opening of international borders especially the re-activation of umrah charter flights drove in-flight catering higher.

Outlook. The conventional mail business of POS continues to struggle to stay relevant in the digital age (the digital economy of Malaysia expanded by 10% in 2020 and is projected to grow at a CAGR of 24% up to 2025). While the conventional mail volume of POS declined by an average of 13% annually between FY14 to FY21, we doubt that we have seen the bottom. Meanwhile, industry experts project the courier, express and parcel (CEP) market in Malaysia to expand by a CAGR of 9% between 2017 and 2027. Incumbent POS faces tremendous competition from new players such as J&T Express and Ninja Van that undercut aggressively on rates to expand their market shares. Players may be able to breathe a sigh of relief following a halt in the issuance of new courier licenses (14th Sept 2020 to 15th Sept 2022) and the introduction of a new courier licensing framework that may set in motion industry consolidation. On the other hand, with the reopening of international borders, the aviation division is on a recovery path with increased flights and cargo tonnages handled, higher utilisation at its warehouses (particularly by e-commence clients) and better demand for its ground handling services.

Maintain MARKET PERFORM with a DCF-derived TP of RM0.55 based on a discount rate equivalent to a WACC of 6.8% and a terminal growth rate of 0%. There is no adjustment to our TP based on ESG for which it is given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) crowded playing field, especially in the parcel delivery segment, (ii) escalation in costs, particularly labour and fuel, (iii) conventional mail service to eventually turn obsolete, and (iv) global recession hurting the demand for transport services.

Source: Kenanga Research - 23 Aug 2022