POS’s 1QFY23 results disappointed, despite recovery in its logistics  and aviation services. Its cost-cutting measures could not counter  further deterioration at its postal segment on: (i) the decline in its  courier volume as competitors cut prices, and (ii) accelerated insourcing of delivery function by e-commerce players. We widen our  FY23F and FY24F net loss by 33% and 24% respectively, reduce our TP by 9% to RM0.42 (WACC: 6.5%; TG: 0%) from RM0.46, and maintain our UNDERPERFORM call.

1QFY23 core net loss of RM26.5m came in wider than expectations,  at 49% and 40% of our full-year net loss forecast and the full-year consensus loss estimate, respectively. The key variance against our forecast came from steeper-than-expected deterioration of its postal business and courier volume (as competitors undercut while e-commerce players accelerated the in-sourcing of their delivery function.

YoY, 1QFY23 revenue came in flat, dragged by waning demand for its postal service (-13%), mitigated by the recovery in logistics services  (+18%), aviation (+20%), and others services (+44%). Its postal sales continued to be affected by the shifting of purchasing trend from online shopping back to bricks-and-mortar, worsened by lower demand from major e-commerce players shifting towards internal delivery capabilities (i.e. Shopee shifting toward its own Shopee  Express).

Meanwhile, its logistics sales recovered strongly with the upliftment of the coal export ban imposed by Indonesian government in January  2022. Whereas, its aviation sales recovered on reopening of international borders especially the re-activation of umrah charter flights which drove in-flight catering higher.

Core net loss was lower at RM26.5m (-18%) mainly due to lower operating costs (-2%) driven by effective cost savings effort including a mutual separation scheme that started since 2021.

QoQ, 1QFY23 revenue rose 3% with positive growth across the board,  i.e. postal service (+1%), logistics (+3%), aviation (+5%), and others services (+14%), on reopening of economies, especially China. 1QFY23 core net loss halved on better cost absorption as volumes recovered.

Forecasts. We widen our net loss forecast for FY23 and FY24 by 33% and 24%, respectively, to account for the deterioration of its postal business.

We reduce our DCF-derived TP by 9% to RM0.42 from RM0.46 based on a discount rate equivalent to a WACC of 6.5% 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.

We are cautious on POS due to: (i) its struggling conventional mail business which is trying 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 being insufficient to counter its weakening core business revenue.

Source: Kenanga Research - 19 May 2023