POS’s 9MFY22 results missed expectations. It registered another quarterly loss as its conventional mail business struggled to stay relevant, dragged further by declining courier volume on aggressive pricing practices and accelerated in-sourcing by e-commerce players. We widen our net loss forecasts for FY22-23 by 19-59%, and reduce our DCF-derived TP by 11% to RM0.49 from RM0.55 (WACC: 6.8%; TG: 0%) and maintain our UNDERPERFORM call.

Below expectations. 9MFY22 core net loss of RM57.2m missed both our and consensus full-year net loss estimates of RM66.3m and RM63.9m, respectively. The key variance against our forecast came from further weakening of its postal business from waning courier volume on aggressive pricing practices and accelerated in-sourcing of e-commerce players.

YoY, 9MFY22 revenue fell 10% dragged by waning demand for its postal (-18%) and logistics (-4%) services while partially mitigated by recovery in its aviation (+25%) and others services (+15%).

Postal sales 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 e-commerce players shifting towards internal delivery capabilities (i.e. Shopee shifting toward its own Shopee Express).

Meanwhile, logistics sales were 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 recovered on the re-opening of international borders especially the re-activation of umrah charter flights which drove in-flight catering higher.

Core net loss more than halved to RM57.2m mainly due to lower operating costs (-14%) driven by effective cost savings effort including the Mutual Separation Scheme (MSS) exercise last year.

QoQ, 3QFY22 revenue fell 5% in the absence of festivities on highly competitive business environment resulting in a slowdown in postal (- 9%), logistics (-11%) and others services (-19%). This was partially mitigated by sustained recovery from aviation (+52%) on the reopening of economy. 3QFY22 core net loss expanded more than doubled due to poor cost absorption (+5%) on reduced volumes.

Forecasts. We widen our net loss forecasts for FY22-23 by 19-59%.

We are cautious on POS due to: (i) its conventional mail business continuing to struggle to stay relevant in the digital age, and we doubt that we have seen the bottom, (ii) its declining courier volume as incumbent POS has to face tremendous competition from new players such as J&T Express and Ninja Van that undercut aggressively on rates to grow their market shares, and (iii) its cost-cutting measures that are insufficient to counter its weakening core business revenue.

We reduce our DCF-derived TP by 11% to RM0.49 from 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 given a 3- star rating as appraised by us (see Page 4). Maintain UNDERPERFORM.

Risks to our call include: (i) sector consolidation that enable big players such as POS to control the market, (ii) better costs management, particularly labour and fuel, (iii) conventional mail service to remain essential for security purposes, and (iv) faster recovery in global economy boosting the demand for transport services.

Source: Kenanga Research - 22 Nov 2022